Stocks are better than bonds as inflation is coming, strategist says

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Stock valuations aren't great, but are better than bonds: Pro

Stock valuations may be at or near record highs and causing concern, but they are still a better investment than bonds, one strategist has told CNBC.

"The global economy is actually improving," Luca Paolini, chief strategist at Pictet Asset Management, told CNBC Friday. "We also see an improvement in earnings revision, which I think is very important."

"[Equity] valuation is not great, but it's still much better than you can find in bonds," he added. "We still feel there is a decent upside for at least the next six months."

Bonds have performed well in 2016. One of the best performing assets have been U.K. government bonds, although improving data in the country and rate hike jitters from the U.S. have tempered their stellar rally.


Gilt yields

U.K. Government Bonds (GILT)

Part of the reason for Paolini's confidence is that inflation is returning in many markets, he explained. Inflation tends to favor equities, with bonds often seen as a safe haven in times of economic stress.

"The trend is actually up for inflation. At some point, if you see a real surprise in global growth, bond yields will start to move higher," Paolini said. Bond yields have an inverse relationship to prices.

Paolini also shared his recommendations on which stock markets investors should consider.

"We still have a preference for U.K. stocks," he suggested. "If you look at Europe excluding the U.K., what we see definitely is the Xetra Dax (the German exchange), but it's a very cyclical market. It is definitely cheap." He also suggested technology and industrials as sectors to focus on, as they have more upside than others.

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