Monthly asset allocation September 2020:
Source: Pictet Asset Management
Our business cycle scores offer some grounds for optimism – brighter prospects for the developed economies have enabled us to upgrade the outlook for the world as a whole to neutral from marginally negative. One key positive development has been Europe’s newly agreed EUR750 billion recovery fund. Encouragingly, 70 per cent of it is expected to be spent over the next two years. China remains ahead in terms of the extent of its recovery, which, along with a weaker dollar, should be supportive for emerging markets and for the materials sector. Whether the vantage point is the economy, the political landscape or Covid-19, Europe appears to be in better shape than the US. Which is why we retain an overweight position in European stocks. EU member states’ endorsement of the Franco-German led EUR750 billion recovery fund last month and the ECB’s continued monetary stimulus put the European economy on a much firmer footing; we have consequently raised our forecast for the region’s GDP growth for 2021 by 1 percentage point to 7 per cent. Crucially for investors, Europe’s stock markets do not yet discount the region’s improving economic prospects. Particularly when compared to their US counterparts. US stocks are already very expensive in any case. For US equities to maintain their current price-earnings multiple of around 24, corporate profit margins would have to remain stable. That is a stretch, particularly when factoring in the US’s continued failure to contain Covid-19, the growing regulatory backlash against Silicon Valley and uncertainty surrounding the outcome of the November Presidential election. Mindful of these risks, we remain neutral US stocks. With an increase in consumer spending a feature of the recovery taking hold in parts of the world, we are attracted to consumer staples stocks. To maintain a defensive tilt in our equity allocation, we have reduced our weighting in financials to underweight. Although banks’ bad debt provisions resulting from pandemic-induced lockdowns have been largely in line with expectations, they remain acutely vulnerable to any setback to the smooth reopening of economies. Moreover, dividend payments are unlikely to recover for the foreseeable future. Regulators across the world– including the ECB, the Fed and the UK’s Prudential Regulatory Authority – have moved aggressively to either cap bank dividend payments or temporarily suspend them. This greatly reduces the investment appeal of financial stocks. As always, if you would like more information please contact your adviser within the Just Service Global network. For all enquiries email firstname.lastname@example.org
The Just Service Client Service Team
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