Wealth managers think that equity markets have further to run thanks to strong earnings, resilient economic growth and continued investment in tech and artificial intelligence. But there are differences to how confident and constructive asset allocators are about the outlook, as this article shows.
The markets are volatile, equities in the US have risen a long
way and the AI story continues to create a buzz. Wealth managers,
it seems, aren”t pulling many chips off the table just yet, even
though enthusiasm for US stocks in particular varies.
Economic growth is resilient and market participation is
broadening beyond a handful of technology stocks.
This creates a more stable backdrop for further gains,
according to Arun Sai, senior multi-asset strategist at Pictet Asset
Management. Against this environment and with limited
action expected from major central banks this year, Sai remains
overweight equities, neutral on bonds and underweight cash. He is
neutral on the US stock market, however. By contrast (see below),
Indosuez Wealth Management, the French house, is positive on the
US equity market.
“AI-driven earnings growth is expanding beyond the technology
sector, benefiting industries such as industrials, utilities and
infrastructure,” Pictet’s Sai said in a note. Sai is
constructive on this trend as long as earnings delivery remains
strong. Like
a number of investment managers, emerging markets excluding
China remain his preferred region. He noted the localized
correction in Taiwan and South Korea, which reflects a pause in
AI and semiconductor leadership after a period of exceptional
outperformance. “Outside of these markets, growth remains
resilient and inflation remains contained,” Sai added.
He expects emerging markets to deliver the highest earnings
growth in the world this year at 56 per cent, more than double
that of their developed peers. (For more on the South Korea
equity market volatility and wealth managers’ views, see
here.)
Sai remains neutral on US equities, where AI leadership is
balanced by demanding valuations. According to his calculations,
70 per cent of US earnings growth comes from AI-related mega-cap
stocks, by far the highest share in the world. While this
concentration creates vulnerability in case sentiment
toward AI weakens, it also means that the US is still the
primary beneficiary of the AI supercycle. That said, valuations
are unattractive, leaving little room for disappointment. He
maintains a neutral stance across other developed markets.
At a sector level, Sai said Pictet remains overweight in
technology, alongside industrials, utilities and financials,
which are well placed to benefit from the current growth
environment and AI-driven investment.
US vs emerging markets
Adrien Roure, multi-asset portfolio manager at Indosuez
Wealth Management is also positive about tech and AI-related
investment. And unlike Sai,
he maintains constructive on US equities and
developed markets. “US equity markets have recorded significant
gains, driven primarily by the technology sector and the
semiconductor segment. This momentum illustrates the strength of
the investment cycle linked to AI and the persistence of supply
constraints in certain strategic segments,” Roure said.
He is positive on US equities and AI-related themes; he
favors broad diversification such as through small and
mid-cap stocks. “The latter, recently affected by the rise in
real rates, should benefit from a resilient economy and potential
stimulus measures in the run-up to the midterm elections,” he
said.
“The concentration of performance is also evident in emerging
markets, with South Korea and Taiwan appearing as the main Asian
beneficiaries of the semiconductor cycle. However, this now
highly-targeted positioning by investors, combined with increased
use of leverage, calls for caution in the short-term,” Roure
said. “Nevertheless, the fundamentals of emerging markets remain
solid, and any correction could represent an interesting entry
opportunity for medium-term investors. Finally, certain Asian
technology players, notably Chinese ones, also represent growth
drivers within the emerging universe.”
Roure takes a more cautious stance toward European equities,
arguing that they suffer from fragile economic activity,
persistent energy reliance on Gulf supplies and the
chance of a return of political risk in the second half of
the year. However, he maintains a positive view on certain
segments such as defense, supply chain security, notably after
Germany and the EU’s recent hike in defense spending.
Fixed income and gold
Sai has upgraded gold from neutral to overweight as investor
demand is strengthening and emerging market central banks
continue to increase reserves. He sees further upside for the
precious metal as real interest rates gradually ease, eroding the
opportunity cost of holding a non-yielding asset.
In fixed income, higher yields have improved value across parts
of the market. However, stronger growth and persistent
inflation pressures mean that Sai does not see the case for
extending duration. He remains neutral on government bonds and
credit. In currencies, Sai has downgraded the Japanese yen
to neutral because improved growth expectations and stronger risk
appetite make the currency less attractive as a defensive
allocation.
Indosuez’s Roure said the bond market is continuing to
be influenced by the path of inflation and how monetary and
fiscal policies play out. He favors short-dated maturities in the
euro area, and retains a positive view on high-quality credit in
the euro area. Yields remain attractive despite spread
tightening. He is more downbeat about US credit, where the
increase in issuance, notably by “hyperscalers,” is a reason for
caution.
Finally, Roure is positive on emerging market debt in local
currencies, which offers attractive diversification potential
thanks to high real rates and a more stable macroeconomic
environment.