Market: MANAGEMENT: Pictet AM returns to US bonds
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PARIS (Reuters) – The climate is turning favorable for U.S. bonds again with slowing global economic growth and the prospect of a slightly less restrictive Federal Reserve (Fed), say Pictet AM, which remains cautious on stocks in due to the risk of downward revisions to corporate profits.

“If we think that global growth will slow down and that we will have a slightly less severe Fed (…) we think that it is the right time to return to American bonds”, declared during a conference Frédéric Rollin, investment strategy advisor at Pictet AM.

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The Fed, which has so far carried out 66% of its monetary tightening according to Pictet, should slow the pace of its rate hikes.

Signs of a crack in the financial system, in particular with the setbacks of the Credit Suisse bank or the turmoil triggered by the presentation of the British draft budget at the end of September, led the markets to revise their expectations on the rates of the major central banks, which may not be ready to risk a systemic shock in the name of fighting inflation, said Frédéric Rollin.

This situation also coincides with the slowdown in US inflation.

The better-than-expected figures in October are the result of lower commodity prices and a rebalancing between supply and demand thanks to the recovery of production and logistics chains, said Frédéric Rollin.

These elements argue for a slower rate hike from the Fed, which will however remain cautious in the face of solid employment data, rising wages and the slow slowdown in inflation, he added.

“The Fed is not our friend, not yet,” underlined Frédéric Rollin. “It should operate for the equivalent of 7.5% rate increases over 2022-2023, compared with +6% in five years (over 2014-2019)”.

DOWNWARD REVISIONS OF EXPECTED BENEFITS

According to the expert, the American economy should virtually stagnate next year under the effect of the rise in interest rates – and its impact in particular on the real estate market and business investment – inflation, which is weighing on household disposable income, and the tightening of bank credit conditions.

The gross domestic product will still be very slightly positive thanks to the relatively good performance of consumption, driven by the savings accumulated by Americans during the COVID-19 pandemic, he said.

The economic slowdown should be accompanied by downward revisions to S&P-500 corporate earnings in the coming months, anticipates Pictet AM.

Profits have held up well so far as companies have been able to raise prices thanks to the strong post-lockdown economic rebound. But this pricing power will weaken due to an expected drop in demand, said Frédéric Rollin.

In the last earnings season, more than 50% of S&P-500 companies beat market expectations for earnings per share, but the trend has been down since the start of the year “and that goes with the ISM of new orders which continue to deteriorate,” added the strategist.

Pictet continues to buy growth stocks, in particular health stocks, which are not very cyclical, and clean energies.

(Laetitia Volga, edited by)

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