Interview with Pictet Managing Partner Raymond Sagayam

Raymond Sagayam, Managing Partner at the Pictet Group and Co-CEO of Pictet Asset Management, believes the eurozone may break taboos and take action that was previously unthinkable. He describes the fiscal stimulus as seismic, stating, “The boost to growth will be huge.” He sees 20% upside potential in European equities, but is less enthusiastic about the return prospects for US equities. The Pictet Group currently manages CHF 724 billion in client assets.

Mr Sagayam, which asset classes would you currently recommend to a Swiss private investor?

I see opportunities in European equities, emerging market bonds and equities, direct private market investments – especially those focused on Europe – and hedge funds. From a Swiss franc investor’s perspective, the cost of currency hedging is an important consideration, as is the valuation level of the asset classes – though this applies to all investors.

So you’re heavily betting on European assets. What are your arguments for this?

I have high conviction in our European focus, particularly given the outlook for equity performance. The market is clearly undervalued, and by clearly I mean that over the next three years, further price gains of at least 20% are possible. This more than offsets the cost of currency hedging. Also, given the strong value appreciation potential in emerging market investments, the cost of hedging plays a lesser role than usual.

And for private market investments, do you consider the entire spectrum?

Private equity, real estate and private debt are all interesting, even if the market is sometimes somewhat overheated. Supply doesn’t always match demand. Nevertheless, attractive returns are still being achieved. Hedge funds have again delivered good performance and the environment, which is likely to remain volatile for some time, should also help sustain good returns going forward.

You haven’t mentioned US assets. Are they not worth buying?

I’d be more cautious there. Where exposure to US assets cannot be avoided – as is often the case for institutional investors – I would favour US government bonds over US equities. Currently, two thirds of the MSCI USA equity index is trading at a price-to-earnings ratio of 25 or higher. This compares to a long-term average of around 18. The market is overvalued and the price-to-earnings ratio is not sustainable given the challenging macroeconomic environment we’re facing. US companies are achieving gains, but not to the required extent. In addition, many are having to sacrifice their margins due to import duties. In my view, the overvaluation is cause for concern in the face of a US slowdown.

And do Treasuries offer a better return?

US government bonds are trading at an attractive nominal yield and a positive real return, despite relatively high inflation. We believe that there will be a convergence of equity and bond returns in the US. And wouldn’t it be safer and better to invest in Treasuries with similar returns? But I should stress again that Europe and emerging markets are where I see real opportunities. I am not a fan of countries with a debt-to-GDP ratio of 120% and a post-war debt high that relies on foreign capital inflows to cover a twin deficit. That is simply not a good recipe.

Emerging markets and eurozone in the lead

What are the drivers behind the continued equity rally in Europe?

I believe this time it really is different. We are optimistic about the growth prospects. What we’re seeing now is not a false dawn, as so often before. Trump is playing into the hands of the eurozone and giving it an unexpected gift – the gift of bringing Europe closer together and strengthening its ties. And it may lead the eurozone to break taboos and take action that was previously unthinkable.

Are you referring to the increased defence spending?

Yes, but there’s a much broader picture here. The pandemic already brought about an initial turning point. Before Covid-19, everything revolved around monetary policy. Fiscal policy was almost permanently banished to the shadows. And then came the pandemic, and worldwide fiscal taboos were broken. Germany, the eurozone’s biggest growth engine, is now waking up from its Sleeping Beauty slumber and showing a willingness to increase its debt spending for a whole series of infrastructure and industrial projects worth EUR 1 trillion. And that’s not even including defence, which adds a further EUR 800 billion – a cautious estimate for the coming years. In addition, there are EUR 750 billion earmarked for the major NextGenerationEU project, to be spent in the coming years on semiconductors, digital and cloud infrastructure, cybersecurity and software across the euro bloc. These are colossal sums, and the stimulus for growth will be huge. Finally, there’s also the potential reconstruction of Ukraine. Many sectors and companies in Europe will benefit from this.

Aren’t these prospects already priced into the market?

No, the scale of the stimulus and multiplier effects are being underestimated. European equities have 20% upside potential from current levels. And that doesn’t even factor in the potential for capital and labour market reforms or debt consolidation.

That’s also good news for the Swiss economy, which is under pressure from the US tariff hammer.

The International Monetary Fund ranks Switzerland number one worldwide when it comes to a simple growth vs inflation metric. No other developed economy makes it into the top 10. Swiss companies don’t try to be all things to all people. There’s real focus in their approach – in the sectors and markets they target and in how they operate. But their ability to innovate and achieve productivity and efficiency gains without resorting to price competition is, in my opinion, unmatched. A perfect example of this is how they managed the massive surge in the Swiss franc and how well they performed under difficult conditions.

The US tariffs of 39% are still a threat. Will the SNB cut its key rate into negative territory in September?

I don’t believe so; the SNB has completed the cycle. Structurally, interest rates only make sense as positive figures, not negative. Something really significant would need to happen before we go back into negative territory – a major market catastrophe or persistent deflationary pressure. We also believe that the ECB reached the endpoint in June. In my opinion, the 85% probability of a Fed cut in September is far too high, given the core inflation backdrop and tight labour market.

What underpins your preference for investments in emerging markets?

Much like in Europe, emerging markets are benefiting from the formation of regional blocs. For these countries, which are now virtually forced to foster much closer cooperation, the threat of tariffs can actually also be positive. The BRICS Plus group – that is, Brazil, Russia, India, China, South Africa and other emerging economies – is a good example. Commodity transactions between the Gulf Cooperation Council (GCC) and China are being settled directly in renminbi. These countries are increasingly finding ways to settle transactions in currencies other than the USD. And when the growth differential between emerging and developed economies widens in their favour – which it will – it will provide a very positive backdrop for emerging market asset classes. They also benefit from a weaker USD.

So you expect a marked slowdown in growth in developed economies?

If we exclude trade and inventories from US GDP – components that can be highly distorting – growth has already been declining since the third quarter of 2024. In the US, high inflation will increasingly be added to the mix as a result of import tariffs. All countries are, of course, affected to some extent by the slowdown in the US and China. However, for the markets, it is the relative advantages and disadvantages that matter – and here we see Europe and emerging markets clearly in the lead. A global trend towards “de-Americanisation” is emerging, reflected by efforts to reduce over-exposure to US assets. The decline of 10% in the USD index since the start of the year has taken place in an environment of relative strength and stability. I find this very concerning and it does not bode well should the markets correct.