CIO Views: UK back in investors’ focus; Bunds in favour
- 25 July 2024 (5 min read)
UK moves back into investors’ focus
| The UK’s economic outlook is improving. Historically, when elections have delivered a change in government with a large majority, markets have performed well. Labour’s parliamentary majority should mark a period of policy transparency - and hopefully growth. The equity market has increasingly traded at a discount to US and European markets while sterling’s relative cheapness should provide a further attraction to investors and overseas corporates looking to acquire UK assets. The Bank of England is likely to start lowering interest rates from their current 5.25% level. Headline inflation dropped to 2.0% in May and further declines in core inflation should be seen over the second half of 2024. UK government and corporate bonds are currently attractive. |
Bunds in favour
| European government bond markets look almost priced to perfection with expectations for a European Central Bank (ECB) deposit facility rate of around 2.70% by the end of 2025. According to ECB President Christine Lagarde, there is a fine line between data dependency and data-point dependency, which will allow the Governing Council to look through unexpected, albeit short-lived, inflation surprises. So what could possibly go wrong for investors? We’ve already had an amuse bouche of government bond volatility in the aftermath of the European Parliament elections. Luckily, this proved to be short-lived. At this stage, Germany stands out, especially given the more liquid trading conditions in its government bond market. | 
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More needs to be done for China’s consumer
| Post pandemic, China has seen some positive momentum - in investment and industrial production and a revival of export growth in some sectors. However, it continues to face challenges, as it looks to rebalance from an investment-led to a consumption-based economy. It needs to find an alternative to the real estate sector as a lasting source of economic expansion. The government announced various policy packages to support its troubled property market. Meanwhile, more needs to be done directly for the consumer, for its transition towards consumption-led growth. But given consumer confidence is very low, policies to expand social safety nets and to grow the middle-income class should be in focus. |
Asset Class Summary Views
Views expressed reflect CIO team expectations on asset class returns and risks. Traffic lights indicate expected return over a three-to-six-month period relative to long-term observed trends.
| Positive | Neutral | Negative |
|---|
Rates | Data flow in major economies pointing to rate cuts in second half of 2024 | |
|---|---|---|
US Treasuries | Election may impact the timing of a rate cut but Federal Reserve is close to easing | |
Euro – Core Govt. | Further ECB rate cuts expected but markets have priced this in | |
Euro – Peripherals | Bonds remain subject to political events and to the relative debt/GDP outlook | |
UK Gilts | New government pledges fiscal stability. Two interest rate cuts expected this year | |
JGBs | Low returns. Policy indecision by Bank of Japan and weak yen make JGBs unattractive | |
Inflation | Stable expectations as data shows gradually lower inflation in the second half of 2024 |
Credit | Income assets should be part of portfolios. Low spreads suggest limited excess returns | |
|---|---|---|
USD Investment Grade | All in yields are attractive but excess return limited | |
Euro Investment Grade | Stable growth and lower interest rates support income focus in credit | |
GBP Investment Grade | Returns supported, given current yields and expectations of a faster pace of rate cuts | |
USD High Yield | Fundamentals and funding strength remain strong | |
Euro High Yield | Strong fundamentals and ECB cuts support total returns | |
EM Hard Currency | Volatility has subsided but a later Fed interest rate cut will delay recovery |
Equities | Earnings cycle remains robust; AI likely to underpin continued concentrated US returns | ||
|---|---|---|---|
US | Growth set to continue to dominate but need to watch company earnings momentum | ||
Europe | Positive economic surprises and attractive valuations | ||
UK | Monetary policy and change of government should boost sentiment | ||
Japan | Benefits from growth in semiconductors. Reforms in focus for broader performance | ||
China | Growth remains unbalanced. Accelerating industrial output, masks a weak consumer | ||
Investment Themes* | Secular spending on technology, automation, to support relative outperformance | ||
*AXA Investment Managers has identified six themes, supported by megatrends, that companies are tapping into which we believe are best placed to navigate the evolving global economy: Technology & Automation, Connected Consumer, Ageing & Lifestyle, Social Prosperity, Energy Transition, Biodiversity.
CIO team views draw on AXA IM Macro Research and AXA IM investment team views and are not intended as asset allocation advice.
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