Pictet Sees 20% Upside in Non-US Stocks Amid Favorable Policies

Pictet, a prominent financial services firm, has released a report highlighting the investment opportunities in stock markets outside the United States. The report, authored by Thomas Poullaouec, the head of the Asia-Pacific Multi-Asset Solutions team, and his colleagues, underscores that these markets offer more attractive valuations and are benefiting from favorable fiscal spending and accommodative monetary policies.

The current landscape, marked by ongoing trade disputes, escalating geopolitical tensions, expanding fiscal deficits, and rising interest rates, should theoretically cast a shadow over risk assets. However, markets are trending towards historical highs, recovering from the lows seen post the "liberation day." Investors appear to be viewing the market from different angles, anticipating that risk factors will dissipate with limited impact or focusing on individual positive factors. For optimistic investors, concerns over artificial intelligence spending have diminished, corporate earnings remain stable, inflation shows no signs of being affected by tariffs, and fiscal spending is increasing. Additionally, the relatively pragmatic trade policy orientation can be seen as a positive factor.

Regardless of the perspective, while downside risks have not significantly decreased, stock valuations have already reflected an extremely optimistic outlook. Investors need to remain cautious, as reality may fall short of expectations. Although tariff expectations have moderated, reducing the likelihood of an economic recession, given that stock valuations are already high and economic and earnings growth may slow, Pictet maintains a cautious stance on equities. Considering the volatility surrounding tariff negotiations, the upside and downside risks for large U.S. stocks are more balanced, leading Pictet to reduce its underweight position in this category. Due to the increased bond supply required by U.S. fiscal policy and the potential for tariffs to drive up U.S. interest rates through inflation, Pictet maintains an underweight position in bonds.

In terms of investment styles, with the resurgence of enthusiasm for artificial intelligence investments, Pictet has reduced its underweight position in growth stocks relative to value stocks. Pictet continues to favor short-duration assets, as the short end of the yield curve is constrained by Federal Reserve policy, while the long end has more upside potential. Pictet maintains a high allocation to inflation-linked bonds and Asian credit. Pictet also maintains a high allocation to cash, as it still offers attractive returns while limiting duration risk. However, some cash has been reallocated to stock risk.

Pictet's report emphasizes that stock markets outside the United States offer better investment opportunities due to their more attractive valuations. The firm believes that the increased bond supply required by U.S. fiscal policy and the inflation threat posed by tariffs have balanced the upside and downside risks for large U.S. stocks, leading to a reduction in their underweight position. Chen Weiwen, Senior Director of Distribution for Greater China at Pictet, points out that given the relatively low valuations and higher likelihood of rate cuts in European markets, European stocks offer more investment value compared to U.S. stocks. Pictet continues to believe that stock markets outside the United States offer better investment opportunities due to their more attractive valuations and the improving market sentiment supported by favorable fiscal spending and accommodative monetary policies. However, considering the volatility surrounding tariff negotiations, Pictet has reduced its allocation to large U.S. stocks.