Sébastien Gentizon has been head of fund and manager analysis at Pictet Wealth Management (the wealth management division of the Swiss Pictet Group) since October 1. He was previously a senior fund analyst in the fund and manager selection team, which is headed by Gregory Kunz in Geneva. Gentizon has been with Pictet Group since 2012. He spent four years in Singapore and was an investment manager at Lloyds Bank and a financial analyst at JPMorgan Chase & Co. in Geneva.
Gentizon reviews 2022 and tells us his vision for the year ahead. A soft landing and a better scenario for emerging markets are among the macroeconomic points he highlights for 2023.
– With less than a week before the end of 2022, what can you conclude?
2022 has been a tough year for traditional asset classes. The conventional 50% equities/50% bonds portfolio has had its worst performance in a hundred years and investors have almost nowhere to hide. So, challenging. But, compared to our peers we have done relatively well at the margin. That has contributed to our fund’s selection, despite defiant times for active managers. It has also been challenging for ESG investments, as there has been a cyclical rotation from growth to value and several ESG strategies tend to have an ESG tilt.
During this period Pictet WM has paid attention to certain global macro hedge fund strategies that have helped. In addition, several themes have continued to show value. It is the case of “pricing power”, where we have paid consideration to companies with the ability to maintain stable earnings and consistent dividends. Also, we like the theme “who pays the bill” for the crisis, which has become more relevant in 2022, as energy prices have soared. Due to the level of uncertainties, we faced in 2022, treating volatility as an asset class was also helpful.
– How have you dealt with the challenges and what specific solutions have you found to weather inflation?
We started early to look for solutions to better weather inflation, including real assets and infrastructures, with the addition of a few strategies in the course of 2021 and up to 2022. It is something in which we have confidence. On a tactical basis, we even have exposure to equity funds focusing on natural resources. This makes tactical sense and has helped to weather inflation. Also, we made sure to select a manager that will integrate ESG principles into its process.
– What is your macro vision for 2023? What risks and opportunities do you identify for the markets?
Now, looking into 2023, our Chief Investment Officer indicates that future prices for commodities like copper and overnight lending rates point to a recession. But the US equity risk premium has been coming down and high yield spreads are still below recessionary levels, indicating we might see a soft landing. But significant financial conditions tightening, and large inflation shock will continue to affect economic activity. Our central view is that rate hikes still have some way to go and that the US and Europe will go into a mild recession in the early part of 2023. But the relatively strong balance sheet of households and companies should cushion the impact. We believe central banks will ease up on rate hikes along 2023 in an environment of gradually moderating inflation that would hopefully lead to a stabilisation in interest rates of around 5.25% in the US.
– What trends do you identify for both fixed income and equities in 2023?
Anyhow, it is important to have a balanced portfolio. On the equity side, we will continue to focus on high-quality companies that can pass the inflation impact to the customer. In fixed income, long-dated US bonds could come back as safe-haven assets and protect multi-asset portfolios in a context of moderating inflation and economic slowdown. Also, it makes sense to start to be more exposed to credit, but cautious, through low duration global investment grade rather than going into the high yield space, that we underweight. Aside, it is always hard to have a view on the US dollar, but we may see its decline versus major currencies. Overall, developed market equities are expected to lack earnings support in 2023, and margin compression should reduce share buybacks. Given high valuations we underweight equity, especially in the US.
The good news is on emerging markets, a challenging area for several years. They still deal with macro tests but should benefit from more depressed starting valuations, some attractive. The improvement of the economic activity in the second half of the year, US dollar weakness, and better financial conditions could help, so we will be looking for maybe relocating at some point.
– What is your strategy to address fears of stagflation?
So, this year has been challenging for active management. But we remain confident that, to avoid mistakes and be successful in 2023, active strategies make more sense. In fact, in 2023 active management and selectivity will be crucial. We pay special attention to managers’ ESG process. In fact, by 2022, we added a few ESG funds, making sure they were well classified under SFDR and relatively well balanced in terms of style. Our own ESG internal scoring implemented with a cautious view indeed allowed us to avoid so far selecting a fund that is facing SFDR regulation downgrades.
While investing across different investment styles, we prefer actively managed funds with high-quality equities, even if they could have faced a challenging 2022. We assume short-duration investment-grade corporate bond funds should prove more resilient than high-yield ones. We also look for solutions to better weather inflation, including real assets and infrastructures. In the end, our role in 2023 is to make sure we select managers with who we have the highest conviction, and that would navigate well in this volatile environment.