(Bloomberg) -- One of Europe’s biggest asset managers is upbeat on UK bonds, saying they will perform much better than euro-area peers after the start of Donald Trump’s second stint as US president.
Pictet Asset Management’s chief strategist Luca Paolini said on Wednesday that the UK was less exposed to Trump’s tariff plans than Europe because the country’s economy is driven by the services sector. UK assets would therefore be “the natural place to be” in a year’s time if new trade barriers are erected, he said.
For now, Pictet holds a tactically neutral position on UK bonds, which have fallen out of favor on expectations that the Bank of England will be cautious in cutting interest rates amid lingering inflation risks. The yield on 10-year gilts rose more than 30 basis points over the past month, the biggest jump among developed-nation bonds tracked by Bloomberg.
“In a global trade war, the downside risks in the UK will be a little bit less than elsewhere,” Paolini said at a briefing.
A buoyant US economy and the prospect of inflationary tariffs and loose fiscal policy from Trump lifted US stocks to a record this month, while the greenback soared to its highest in two years. While this has made it difficult to buy anything other than US assets at the moment, Paolini said that gilts, UK stocks and the pound would be good ways to bet on improving economic fundamentals.
“You cannot just be long the US — you need something to offset that position, and I would say the UK is probably the best place for that,” he said.
‘Incredibly Vulnerable’
Pictet, which oversees $291 billion in assets, rates the euro area as “the worst” when it comes to global economic performance, saying that Trump’s tariffs may come at a time when European manufacturing industries are already struggling from weaker demand.
“Europe is incredibly vulnerable because it’s very manufacturing based, especially Germany,” Paolini said. “If you put all the regions from the best to the worst, Europe scores the worst.”
Such a bleak outlook may send the euro down to parity versus the dollar in the short term, Paolini said. A growing number of banks see a risk that the common currency will fall to $1 in the coming months from around $1.05 now as the European Central Bank delivers more rate cuts than the Federal Reserve.
“The Fed will stop cutting rates very soon, and the ECB has more room to cut because inflation is more benign and because growth is weaker,” he said.
Rising geopolitical tensions also make US assets more attractive than those on the old continent, according to Paolini. Still, he said the market reaction to the latest developments in the conflict between Russia and Ukraine was overstated.
“It’s more likely than not that the geopolitical situation in a year’s time will look better than it does now,” he said.
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