César Pérez (Pictet WM): “I would only go public if the S&P drops to 3,200 or 3,500 points” | markets

He is a veteran of asset management and private banking. César Pérez, Global Chief Investment Officer at Pictet WM, is responsible for €262 billion of assets under management. He affirms that the line that separates the current situation from a recession is getting thinner and has emphatically opted to protect the portfolios, without interest in strengthening positions on the stock market. Only if the S&P collapsed further, into the 3,200 to 3,500 point territory, would it be time to buy. And he also points to a new and disturbing trend in the market, the conversion of assets into weapons of war, as the conflict in Ukraine has shown, with energy and food as obvious examples.

What is your forecast for inflation in the coming months?

Although Wall Street economists say that it is going to fall and that it will go down to 3% in the next 12 to 18 months, on the street they say that prices are going to rise. I think it will fall, but at a higher level than the market anticipates and in a more structural way. At what speed it goes down will be the key to see if the Fed takes on the economic cycle or not. If you keep raising interest rates aggressively, you will end the cycle. If it doesn’t, inflation may become structurally higher. And in both cases, the foreseeable thing is that the valuation multiples of the shares will drop.

Do you think that the solution to inflation lies in rate hikes?

Some economists consider that we are facing a problem of demand. Others consider it a bargain. I think there is part of both, a problem with supply and also with demand. If it is demand, it is solved by raising interest rates and destroying wealth. If it is a supply problem, due to supply bottlenecks, such as in energy and food, raising interest rates does not help. And why do central banks do this then, if the cure is worse than the disease? They do it because they have to show that they are doing something. The bottlenecks are not going to be solved, for the time being.

What decisions are you making in the face of current uncertainty?

The chip has changed significantly. In the last ten years, people have been buying on the dips and now it is time to sell when the Stock Market rises. We are neutral on equities, quite defensive. Above all, we avoid young growth companies with no benefits. We had quality growth in stock portfolios and we have changed it more to the energy sector, leaving banking and cyclicals and buying, for example, pharmaceuticals. We want free cash flow. In addition, we have moved from European stocks to more defensive Swiss stocks.

Are they preparing portfolios for a recession?

We are moving our portfolios, given that the probability of a recession increases. The line to avoid it is getting finer. But to get even more negative, since we are already defensive, you would have to think that it is not possible to avoid the recession, and we are not there. With the fall in equities, our portfolios are already underweight in equities and I am not going to repurchase the Stock Market. Yes, I would buy in the 3,200-3,500 of the S&P.

“Political uncertainty has weighed heavily on investment in Spain. The current government is not very functional”

Is the market underestimating recession risk in its current earnings forecast?

At the moment, for this year we estimated a growth in corporate profits of 8% to 10%, due to sales, not due to operating leverage like last year. Now, the profit forecast without the energy sector is at 4% to 5%. If there is a profit recession, it can go to 0%, and we have started to see that some companies, like Apple or Microsoft, indicate that the margins are starting to tighten. The market can only digest this if it starts looking at 2023 with optimism.

And the fixed income? Have they started buying on the surge in yields?

I’m also defensive on fixed income. In all portfolios I have reduced credit risk, high yield debt or contingent convertible bonds. And we remain heavily underweight peripheral government debt. But I am beginning to be neutral in sensitivity to changes in interest rates and beginning to buy duration and investment grade in the United States. Ten-year inflation is hardly going to be 3.5%, given the demographic and growth problems that exist. And the bonus from 3.2% begins to be attractive. There is also beginning to be value in short duration investment grade bonds. Even ten years out, according to our estimates, investment-grade debt can provide 4.5% a year, versus just over 6% for equities.

Is it time to give more weight to fixed income in portfolios?

Bonds are going to start acting as a diversifier in portfolios. We could see the revenge of the strategy of allocating 60% to equities and the remaining 40% to fixed income. Even so, the conservative client cannot explain how he has been able to lose money on fixed income, which is neither income nor fixed. We are now seeing money pouring into stocks for the wrong reasons. People are selling fixed income, even 4.5% yield-to-maturity bonds, to buy stocks because they mistakenly think they are more protected. I think there are going to be accidents in fixed income, with defaults, especially in high-yield debt. There have been many tourist investors in fixed income.

Are you interested in Spanish assets? What place do they occupy in the portfolios?

To be totally honest, I have been quite negative in Spain for the last four years. Political uncertainty has weighed heavily. But we see the end of the tunnel in tourism and Spain has exposure to Latin America, a great beneficiary of the high prices of raw materials. On the other hand, you have to be sure of the political situation and the regulatory intentions when investing in Spain, or in any other country, and the Ibex has quite a regulated sector. The problem is that the current government is not very functional. Any combination would be good, whatever it may be, that has a more functional majority and less intention to penalize the business sector.