The strongest case for stocks is a lack of alternatives but investors should be prepared for setbacks and get into defensive shares like consumer staples and healthcare as global growth has peaked, according to Philipp E. Baertschi, the chief strategist at Sarasin in Zurich.
“Every time one outbreak of fire is extinguished, fresh funds flow into the equities. Nonetheless, the prospect of an impending slowdown in growth raises the risk of a long period of negative surprises,” said Baertschi in a research note.
“We have significantly reduced the portfolio risks by downgrading financials, materials and industrials,” he added.
With growth rates still relatively high, Baertschi predicts it will take time for stocks to catch up with the realization that gross domestic product growth has peaked.
“We think it could be a while before the financial markets adjust to the weaker growth rate,” he wrote.
“Since the shift in expectations is much more important for the financial markets than the current robust growth level, for the moment at least, the macro picture does not give risky assets support” Baertschi added.
Having turned negative on emerging market stocks earlier this year Baertschi has now cancelled his underweight rating on the belief that negative surprises from developed markets will see a shift back into emerging markets.
“The valuation for emerging markets is attractive, based on a price/earnings ratio of 10, and offers a good amount of upside in the second half of the year,” said Baertschi.
“We remain overweight in commodities because we expect a recovery to follow the big correction,” he added.