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Time to trim emerging market stocks says Pictet, 'potholes' ahead

LONDON Oct 11 Swiss wealth manager Pictet said on Tuesday that it was time to trim back on emerging market equities following their red hot run this year and as a series of political and financial market "potholes" loom ahead.

Luca Paolini, chief strategist at Pictet Asset Management, said that although the global macroeconomic backdrop remained benign, the more than 15 percent jump in EM stocks this year meant it made sense to lock in some profits.

"Given that a series of political and market potholes is likely to emerge over the coming months, we have decided to cut our weighting on emerging market shares to neutral from overweight," Paolini said in a note.

"Our change in stance also reflects the fact that we are a little suspicious of Chinese economic data, which have exceeded expectations over the summer after government fiscal stimulus triggered explosive gains in the housing market."

He said they doubted Beijing would keep its foot on the accelerator for the rest of the year, conscious that the recent pick up owed much to "another great helping of debt".

Alongside emerging markets, Pictet also downgraded its stance on global equities albeit retaining its 'overweight' preference for Japanese equities.

In bonds, it said U.S. government bonds were a better bet than euro zone sovereign debt and that it had also turned negative on European credit in general.

"With the Fed apparently destined to hike interest rates in December and the ECB still in monetary easing mode, it might seem that European fixed income markets offer more attractive investment opportunities than their US counterparts. In our view, the opposite is true," Paolini said

The yield differential between U.S. 10-year Treasuries and German Bunds was starkly at odds with economic reality, he added, with Europe not only growing faster than the U.S., but investors also underestimating the prospect of the European Central Bank scaling down its huge stimulus programme next year.

It retained its overweight on UK equities but also its underweight on UK government bonds.

"In terms of Gilts we are negative," Paolini said. "But we have already seen a big move so we don't see a big reason to change."

"The pound at the current level is becoming interesting." he added. "But you probably need to get to at least $1.20 to make the case that the worst is over for sterling." (Reporting by Marc Jones; Editing by Dominic Evans)

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