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US Equity Selloff Creates Opportunities - Private Bank

Tom Burroughes, Group Editor , January 10, 2019

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The Swiss firm reckons the selloff to US stocks last year provides opportunities because of how underlying performance of the economy doesn't fully justify the move.

Pictet Wealth Management, the Swiss private bank, sees the late 2018 sell-off to US equities as possibly overdone and thinks further weakness gives investors a chance to buy back into the market. 

As wealth managers engage in the usual round of predictions of what to do in the year ahead, Pictet said that the fall in US equities last year “may have been excessive with regard to still-decent fundamentals”. We will continue to use spikes in volatility for tactical advantage, believing they offer opportunities,” it said.

Stocks fell last year, and valuations have eased. On the S&P 500 Index of US equities, for example, the price/earnings ratio for 4 January this year was 19.31, down from 22.09 times earnings a year ago. Across equity markets in general, the MSCI World Index of developed countries’ equities fell by 8.71 per cent. Worries about US-China trade tensions and rising protectionism, headwinds from rising US interest rates, and the sheer fact of high US market valuations, had weighed on markets at the end of last year.

Turning to other sectors, Pictet said it was cautious about corporate credit overall because leverage, increasing rates and slowing growth make the climate for this asset class “challenging”. 

“We are neutral on US Treasuries overall, with their relatively high coupon providing some protection against the further, limited rises in US rates we expect,” the firm said. 

The private wealth manager said it sees alternative assets – such as private equity and forms of property – as ways to raise returns and diversify portfolios when performance from conventional markets appears to be “relatively uninspiring”. 

“Private equity should keep its illiquidity premium over public equities, and we are exploring private equity real estate,” it continued.

The bank is targeting a spot oil price figure of $51 per barrel by the end of the year, seeing the “equilibrium” oil price holding around present levels, and with limited potential for further falls so long as the dollar stabilises and global gross domestic product grows by around 3.5 per cent. 

In its home turf of Switzerland, Pictet said that the Swiss franc could appreciate because of a current account surplus by the Alpine state, trading around SFr1.15 against the euro on average this year. It also expects the dollar to lose some strength against the euro, particularly if the European Central Bank begins to normalize interest rates.

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