Pictet Asset Management has released its March Barometer. According to Luca Paolini, Chief Strategist, Pictet Asset Management, 'The risk-on rally that framed the start of the year abruptly ran out of steam in February. Investors had convinced themselves of a goldilocks outcome to 2022’s big monetary squeeze. Inflation would come down fast while the economy remained resilient. Investors are now having second thoughts. Sticky inflation has reawakened fears about how high official interest rates are headed and how long they’ll stay there.

We take developments of the past few months with a pinch of salt. We have long believed that official rates are likely to plateau for significantly longer than the market consensus believed. And while the economy is more resilient than previously anticipated, we think that the widespread strength seen in industry and employment data could be overstated by seasonal factors and warmer than expected weather. Moreover, even though inflation data were disappointing, we continue to believe that fundamental economic factors will tame price pressures over the coming quarters and our forecasts for a decline in US inflation remain unchanged.'

h3> Asset allocation

We remain underweight in equities, overweight bonds and neutral on cash. We appreciate the allure of the unusually high yield on cash, but we think that the valuation case for taking duration risk remains attractive and therefore retain our bonds overweight.

Equities

All roads lead to emerging markets (EM). According to our models, the emerging world is where stock investors will find the best value, the strongest economic growth prospects and the most supportive liquidity conditions:

We maintain our overweight position in emerging market and Chinese equities. Chinese manufacturing activity is expanding at its fastest pace in a decade and the service sector is also growing strongly. Chinese consumers have considerable firepower which, in turn, means higher demand for imports and increased Chinese tourism, both of which should boost prospects for other Asian economies e.g. Singapore, Vietnam and Thailand. China’s stocks look especially good value given their recent correction. Earnings revisions for Chinese companies have turned positive and we see potential for further upgrades. Investor positioning in Chinese stocks is bearish, making for a strong investment case for the asset class. We remain cautious on US and European equities. We remain underweight in industrials, due to these stocks' extended valuations, which would revert sharply on any evidence of weakness in global growth. Healthcare remains our favoured defensive play but we also like communication services, which we believe offer exposure to structural sources of growth at an attractive valuation.

Fixed income

We maintain our overweight stance in US Treasuries. Why? Valuations are certainly appealing. US government bonds offer good value given the benchmark 10-year yield has risen to 3.95%, above our long-term fair value estimate of 3.5%. We also like US inflation-linked bonds, whose 2-year real yields of around 2% looks particularly attractive. Elsewhere, we remain overweight in emerging market local currency debt. However, we continue to be wary of high yield bonds because we think the current market pricing is at odds with the asset class’s fundamentals.