Luca Paolini, chief strategist at Pictet Asset Management comments on the groups decision to overweight European equities whilst downgrading Pacific stocks, with the exception of Japan.
We keep our preference for Japanese and European stocks, but we upgrade the latter to a full overweight. The Pacific ex-Japan region is downgraded on account of the slowdown in China, which could become a drag on its Asian trading partners.
The allure of European stocks has increased now that Greece and its creditors are progressing towards a new bailout deal that should keep the country in the euro zone. As the uncertainty surrounding Athens has lifted, a more positive light is shining on the region while valuations have become more reasonable following the correction of the past few months.
Economic growth is resilient, led by a recovery in debt-laden countries such as Spain and Italy, which has made up for economic weakness in Germany. This is supporting corporate earnings in the euro zone. Earnings are expected to grow 7.7 per cent this year but our models suggest they could accelerate even further.
Much of the recovery has been attributable to strong household spending, reflecting improved consumer confidence. Business spending growth remains muted but the European Central Bank’s latest bank lending survey is encouraging with reports that credit standards on loans to companies have continued to ease, and that a net 13 per cent of banks reported an increase in demand for corporate loans up from 1 per cent in the previous quarter.
Our proprietary monetary conditions indicator shows that credit conditions in the euro zone are at their most stimulative in at least 20 years. These improvements suggest the ECB’s monetary easing policies are succeeding.