Despite continuing market volatility and geopolitical tensions, a number of wealth managers believe that equity markets have further to run thanks to strong earnings, resilient economic growth and continued investment in tech and artificial intelligence.
Although the global equity rally may have stalled in July and
markets have been choppy, 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.
“AI-driven earnings growth is expanding beyond the technology
sector, benefiting industries such as industrials, utilities and
infrastructure,” he said in a note. Sai is constructive on
this trend as long as earnings delivery remains strong. In line
with a number of investment
managers, emerging markets excluding China remain his
preferred region.
Sai noted the localised 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 towards 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. However, in contrast with Sai’s neutral stance,
he maintains a 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
favours 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 towards European equities,
arguing 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 defence, supply chain security, notably after
Germany and the EU’s recent hike in defence 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 favours 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.
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