Fortune favours the brave, at least in the next five years– Pictet

Added 14th June 2016

Why is the dollar so expensive when US productivity growth is zero and there are political risks?, asked Luca Paolini, chief strategist at Pictet Asset Management.

Fortune favours the brave, at least in the next five years– Pictet

“The dollar is roughly 20% overvalued,” he said. “For that reason, we feel that the dollar will change. We’re heading towards a weaker dollar, and that’s the time to invest in emerging markets. This is where the economic growth is, where the valuations are most attractive, and where you’re seeing positive economic reform.”

“We believe the dollar will depreciate over the next five years, and this is good news for emerging assets as they are negatively correlated with the currency,” he explained. “Because as history shows, a depreciating dollar tends to coincide with strong returns from emerging market bonds and stocks.”

Going forward, the weak spots of global financial markets are US stocks and government bonds, in Paolini’s view.  

But even by allocating more to emerging market stocks and bonds and less to US equities and government bonds, investors will still not secure an attractive risk-adjusted long-term return. To achieve that, they will need to embrace alternative investments.

“If the dollar depreciates, then gold should do particularly well,” he explained. “Investors will also need to look to alpha-generating strategies such as total return, absolute return and tactical allocation.”

And to get decent real returns in the next five years, investors will need to take a little more risk, according to Paolini. “They will need to be braver and more tactical.”

Some economists believe one way of getting out of the productivity sluggishness is to ban cash. In Paolini’s view, what is next for monetary policy is either some form of helicopter money where the central banks send a cheque to everybody or to finance infrastructure spending. “If there is another recession, which may happen within five years, this is the inevitable way out,” he said.

But investors should not necessarily allocate capital to infrastructure; rather to regions or countries that are already experiencing higher than average rates of economic expansion and whose financial assets are trading at levels well below the historic average, according to Paolini.

Bank of Japan, which has experimented extensively with quantitative easing already, will be the first to try helicopter money, Paolini said.

Sponsors

Overseas earners will be key amidst 2017 inflation

Sponsored by Neptune

Overseas earners will be key amidst 2017 inflation...

A by-product of sterling weakness is inflation, and we expect this to continue to gather steam over the coming months, with energy and food prices the hardest hit....

Kames Income Hub

home_research_centre

Vincent McEntegart, manager of the Kames Diversified Monthly Income Fund, explains how he aims to deliver a stable and sustainable income of 5% p.a.*, paid monthly, by investing in a range of asset classes

Square Mile Research

AXA Distribution Fund
AXA Distribution Fund

Talking Factsheets is a video service for users...

Visitor's Comments Add your comment

Add Your Comment

We won't publish your address

Profiles

Viewpoint

Investment Strategy

Feature

Tweets

Events

PA Japan 2017
PA Japan 2017

Wednesday 8th March
Furniture Makers' Hall, London

PA Dublin 2017
PA Dublin 2017

Tuesday 14th March
Westbury Hotel, Dublin

PA Asia 2017
PA Asia 2017

Wednesday 22nd March
Furniture Makers' Hall 

PA Alternative Ucits 2017
PA Alternative Ucits 2017

Tuesday 25 April
The Langham, London

Sponsored Content

Investment Strategy

OTHER STORIES FROM LAST WORD...