Pictet Asset Management
Looser monetary and fiscal policy should help equity markets build on their gains and we expect emerging market stocks to pull away from the rest over the near term.
Asset allocation: outlook for equities remains positive
Equity markets have seen a positive start to the new year, and the key ingredients are there for more gains. Liquidity conditions are favourable, governments around the world are increasing public spending (be that Japan, US or Germany), economic growth prospects are solid and inflation appears to be in check. We therefore continue to overweight equities and underweight bonds, and have increased exposure to industrials and emerging markets.
The business cycle indicators we monitor support our view. In the developed world, economic conditions are positive in the US, euro zone, UK and Switzerland. But it is in emerging markets (EM) where growth appears especially strong. We expect the gap in GDP growth between emerging and developed economies to widen to 2.5 percentage points this year from 2.3 percentage points in 2025, paving the way for outperformance of EM assets. Higher commodity prices could provide a further tailwind, particularly if the US dollar weakens further.
Conditions in China are less clearly positive than elsewhere in EM. Growth is meeting the 5% government target, but the economy is struggling to shift from export-led to domestic demand-driven growth.
In the developed world, the US economy is supported by positive corporate sentiment and hiring intentions. However, we are concerned about the fact that household spending is being funded by savings rather than income – a situation which is unlikely to be sustainable over the medium term.
For Europe, growth prospects hinge on the effectiveness of planned fiscal stimulus and infrastructure spending, particularly in Germany. Structural reforms – such as the EU Capital Markets Union, labour market improvements, and energy diversification – could provide further catalysts for growth. On the flip side, the strength of the euro remains a risk for the region’s exporters.
Currency appreciation and its potentially negative effect on exports is also an issue in Japan, where the upcoming snap elections could open the door to a large publicly-funded stimulus package. This supports the case for tighter monetary policy. Boosting the currency will, in our view, be a priority for the BoJ. We expect the central bank will continue to normalise its balance sheet, raise interest rates in both April and December and intervene in the foreign exchange markets. If inflation momentum persists, there is a risk that central bank tightening could temper Japan’s GDP growth.
