Market outlook

Dialling down risk after rebound

Equity markets staged a strong rebound in February following the previous month’s drop as a pick-up in the pace of both merger and acquisition and IPO activity coincided with a bullish shift in investors’ tactical positioning, says Pictet Asset Management in the latest Barometer-report.

Facebook’s purchase of messaging company WhatsApp for USD19 billion and a string of US stock flotations helped push US stocks back towards record levels, Pictet says.

Yet the biggest gain in developed market equities was delivered by Europe, which is the best performing region year-to-date despite persistently weak corporate earnings. Japanese stocks lagged global indices, however, as investors scaled back positions, concerned at the impact of the looming increase in the country’s consumption tax.

According to Pictet, the emerging market stocks also trailed the broader market although this masked a wide dispersion in the returns of individual markets. The political turmoil in Ukraine undermined sentiment towards Russian stocks, whose falls in February leave the market nursing a sharp loss year-to-date. At the other end of the scale, Indonesian equity markets rallied, taking their gains for 2014 to around 15 per cent.

Technical factors are also likely to have played a part in the rally. Some of our investor sentiment readings indicate positioning had become unusually bearish following last month’s market slump (see chart), creating the conditions for a rebound.

”Certainly, economic data and corporate earnings figures were not especially positive”, Pictet says. US retail sales and industrial production fell in January while earnings revisions for companies worldwide continued to trend downwards. Japan was the only major market where earnings forecasts bucked the general trend.

As equities gained, developed market government bonds ended the month more or less flat. Emerging market debt, meanwhile, delivered strong gains, with local currency bonds benefiting from a rebound in currencies such as the Turkish lira and Brazilian real. Elsewhere,

high-yield bonds fared better than investment-grade debt. Commodities also saw strong gains – gold rallied by some 8 per cent.

Overall Pictet reduces equities to neutral; although stocks’ medium-term prospects are positive, the odds for a correction in the near-term have shortened.

Regionally Pictet remains overweighting emerging market stocks for both fundamental and technical reasons; European and US stocks appear over-valued.

Sector wise asset management company  remains overweighting cyclical sectors such as energy, materials and industrials. ”We expect capital spending to rise”, Pictet says.

And finally Pictet continues to favour high-yield bonds over investment grade, largely on valuation grounds; we are alert to opportunities in emerging markets.

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