Barometer: Cutting back on equities as financial conditions offer less support

Pictet is reducing equity exposure to neutral and adopting a slightly more defensive multi-asset stance because tighter financial conditions and geopolitical and fiscal risks increasingly offset resilient growth and earnings.

• Government bond yields remain about 30 basis points above their starting-year average, while excess liquidity is shrinking across every major economy except China and central banks are expected to raise borrowing costs further.
• The US economy is expected to grow by about 2% this year and next, while European GDP growth is forecast to accelerate from 1% this year to 1.4% next year; US corporate earnings are expected to rise by about 15% next year.
• Equities remain expensive relative to bonds despite their recent pullback, but positive technical signals and November seasonality partly offset the risks; Pictet keeps bonds at neutral because their value may not be realised without a broader growth shock.
• The allocation changes favour quality and selected defensive assets: healthcare is upgraded to overweight, financials to neutral, emerging markets ex-China remain favoured with forecast earnings growth of 27% next year versus 17% for global equities, and Chinese equities are downgraded to underweight.
• The Swiss franc is upgraded to overweight after falling about 5% on a real-effective-exchange-rate basis over five months, while gold remains overweight; local-currency emerging-market bonds ex-China are reduced to neutral and AI-related borrowing is seen as a supply and duration risk, with hyperscalers potentially representing 11% of US investment-grade bonds by the end of next year versus roughly 5.5% currently.

Takeaway: Investors should trim cyclical equity risk rather than abandon risk assets, combining neutral equities and bonds with healthcare, emerging markets ex-China, the Swiss franc and gold, while monitoring AI-financing risks, fiscal pressures and the resilience of corporate earnings.