Pulles: The Fed and the Bank of Japan may face greater challenges, but still preferentially allocate stocks on the high side

According to the latest report released by Thomas Poullaouec, Head of Multi-Asset Solutions for Asia Pacific at Pictet, the unexpected rate hike by the Bank of Japan at the end of July, coupled with the Federal Reserve's decision to postpone rate cuts the following day, and the weaker-than-expected labor data released by the United States, led to a global sell-off in risk assets. Japan was one of the stock markets most severely impacted. The sharp rise in the Japanese yen exacerbated the sharp decline in the Japanese stock market, leading to unwinding of yen carry trades. On the other hand, market expectations for U.S. economic growth adjusted rapidly, with investors concerned that the Federal Reserve may be lagging behind the situation, potentially posing greater challenges for both the Federal Reserve and the Bank of Japan.

Pictet stated that in the United States, recent economic data reflected a deterioration in manufacturing and consumer financial conditions, with subsequent employment data also falling short of expectations. There is a view that when interest rates are lowered, the adverse impact of high rates on small-cap stocks will decrease, but small-cap stocks are more sensitive to the economic environment, which is currently a major concern in the market. Given the difficulty in determining whether the economy will experience a "soft landing," if there is a lack of clear evidence indicating that growth will stabilize, rate cuts may not be sufficient to stimulate small-cap outperformance.

Pictet maintains a slightly overweight allocation to equities, as the recent market decline has improved valuations. Value stocks are expected to benefit from loose monetary policy, while the higher expectations for growth stocks may affect their performance. In terms of fixed income, Pictet continues to favor higher-yielding segments, such as high-yield bonds, Asian credit, and emerging market bonds, as the overall fundamentals remain supportive