Diversifying away from US equities and bonds, with Europe being a credible alternative.

Business Times

4 days ago

[GENEVA] The post World War 2 global architecture worked on the basis that the US provided the world with economic stability, security guarantees in Europe and Asia, as well as safe assets like treasury bonds and higher returns through US equities.
And in return, the US enjoyed capital flows from other countries investing their surpluses in it. But this set-up is faltering, said Alexandre Tavazzi, head of the chief investment officer's office and macro research at Pictet Wealth Management.
Against the above backdrop, he sees a mega-trend of capital repatriation from the US. He noted that 'the world has a lot of capital tied up in the US', amounting to about 90 per cent of the US' gross domestic product (GDP).
'You don't want to be nasty with the people who have financed you, but this is what is taking place in US,' he said.
A major trend that investors can play on is Europe's revival, which is led by Germany's awakening, said Tavazzi. He pointed to huge increases in spending by Germany on infrastructure and defence, as well as reform of the debt brake at the state level.
For one, Germany's net borrowing at the federal level is expected to jump from 1.2 per cent of GDP in 2024 to 3.3 per cent of GDP in 2025, before rising to 3.9 per cent of GDP in 2026 and 2027.
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Tavazzi is positive on European fixed income, where the 10-year minus 2-year yield spread for German bunds is higher than that for US' treasuries.
He also sees European equities, which are less expensive than those of their US peers', playing catch up on the back of improving European growth prospects.
Tavazzi is eyeing an improving GDP growth outlook for the euro area from the more supportive policy mix, including the German fiscal bazooka and rising defence spending.
Meanwhile, in the US, a gradual artificial intelligence (AI) boost only partially offsets drags from debt overhang, more frequent supply shocks and higher interest rates.
As the US becomes less exceptional, weakness in the US dollar is posing a big challenge to non-US dollar denominated investors, for whom it was great previously to be in US assets without being hedged, said Tavazzi. He added that the US' imposing of higher trade tariffs on trading partners is hurting the greenback.
In China, Tavazzi sees an economy with a strong manufacturing segment but a weak consumer.
'The difficulty in China is to have a clear view about the earnings of the companies in the market, because in the end, when you buy a market, you buy the earnings. And so far, we have not seen a lot of changes in terms of expectations of earnings going higher,' he said.
He noted that the housing crisis in China is deflationary and this needs to be resolved before consumer sentiment there can improve. 'We still are dealing with the aftermath of the housing bubbles and the issues, and this is still something which is not ending,' he said.
He is bullish on China's technology prowess, which is challenging the US' technological leadership. He notes China has the ability to scale innovation across industries such as AI, autos and semiconductors.
Asset management
Echoing the need for investors to diversify away from US equities and bonds is Raymond Sagayam, managing partner of Swiss-headquartered Pictet Group and co-head of Pictet Asset Management, which manages around 273 billion euros (S$409.8 billion) in assets for institutional, wholesale and retail clients.
Pictet Asset Management has over 400 investment professionals and nine investment centres globally. It has four investment centres in Asia – in Tokyo, Shanghai, Hong Kong and Singapore.
Sagayam said that psychological damage has been done by recent major government policy shifts in the US. With investors looking to diversify away from the US, European stocks and bonds can be credible alternatives, he noted.
'We are all familiar with the fact that there is a fair amount of bureaucratic rigidity in Europe. But this is also a golden opportunity for Europe to coalesce and drive forward a reduction of red tape and more of a joint effort on issues such as common debt issuance or infrastructure development,' he said.
He pointed out that it is a myth that the Magnificent Seven have a monopoly on innovation, the seven being US tech giants Alphabet, Amazon.com, Apple, Meta Platforms, Microsoft, Nvidia and Tesla.
Sagayam sees money starting to flow into Europe, Japan and emerging markets. He also believes that sustainability is important despite the environmental, social and governance backlash among some investors.
'Sustainable investing is actually prudent and should make for better long-term investment outcomes for our clients.'
In his view, the focus of the asset-management business is not size but about being the finest. The business focus is on delivering multi-year performance, and not that over a single year, he added.
With managing partners at Pictet Group serving for around 20 years each, Sagayam pointed out that clients benefit from a sense of stability from having the same managing partner for many years.
Sagayam also sees scope for investors to recalibrate to more active asset management as the embracing of passive investment strategies with the ensuing fee compression makes sense only if there is geopolitical stability.
He shared that Pictet Asset Management's assets under management (AUM) in Asia has grown by about 40 per cent over the past five years.
'In the next five years, we want to make sure that much of our focus is on servicing private clients and institutions in Asia, who are looking for innovative global and European exposure, including in topics such as thematic investments,' he said.
Sagayam likes where Pictet Asset Management's business sits today.
'We don't tend to over-hire or over-fire. That's why right now, when many asset managers are radically slashing people and costs, we find ourselves in a fortunate position that we don't have to do that,' he said.
Quant investing
An area where AI is making a big impact in the asset management business is quantitative investments. Today, quantitative analysis of all companies in a universe can use hundreds of features and capture the relationships between the features.
With the help of AI, quantitative investment today can capture shorter time horizon market inefficiencies, said David Wright, co-head of Pictet Asset Management's quantitative equities and solutions (Quest) team.
He said quantitative investments have had a good run over the past few years and that AI is raising investors' comfort level with this kind of investment.
The Quest team has 22 professionals, including numerous PhD holders, and over US$23 billion of AUM.