Advertisement
Advertisement
Chris Iggo
Chris Iggo is chair of AXA Investment Managers Investment Institute and chief investment officer of AXA IM Core. An experienced leading thinker on asset allocation in traditional markets, Chris has over 30 years’ experience in the investment industry, with previous roles including head of strategy at Cazenove Fund Management, and chief US economist and chief European economist at Barclays Capital.
The US central bank is expected to maintain higher interest rates for longer, not unlike in the months leading up to the global financial crisis. The trouble is that monetary policy eventually works and central banks can’t really control how that plays out.
As companies develop ways to improve how we farm, breed fish for food, package food, and so on, they will need the backing of investors. If the world is to reduce carbon emissions and their impact on the planet and the global economy, billions more needs to be invested in nature-based solutions.
The belief in a soft landing for the global economy is not widespread, and as a result participation in the strong equity market performance has been limited. Halting interest rate rises, an improved global growth outlook, and an end to the war in Ukraine would help ease investor concerns.
There is a shared view among investors across Asia that developed economies face moderate recession risks after a year of monetary tightening. Inflation is falling in Australia but a mortgage crisis looms, while China’s recovery is weighed down by poor consumer confidence and property market concerns.
Advertisement
There is much contradictory evidence on whether the US will go into recession, and if so, when. For a recession to materialise, there would have to be worse corporate news and a higher unemployment rate.
In spite of enduring a period of falling earnings, forecasts of recession and rising geopolitical tensions, the technology sector is leading global returns. Drivers of performance include the US pursuing more tech investment, increased focus on supply chains and the explosion of interest in artificial intelligence.
The fight against global warming will drive reallocation as job types and investment patterns are expected to change worldwide. Obstacles to this continue to be political will, the permitting process for innovative technologies, technology limitations and infrastructure.
In the US, large banks remain safe but there is little political appetite to throw fiscal support at the smaller, failing banks. In Europe, the shock that Credit Suisse’s AT1 bondholders were made to absorb losses first, continues to reverberate.
When even the fashion industry seeks new metrics, it’s time to look at alternatives – from green growth’s clean energy transition to “agnostic” growth’s ignoring of GDP.
The global economy has been hit by many shocks and short-term uncertainties remain, but science-led structural changes will provide growth opportunities.
Bond markets appear aligned with the consistent messages of higher inflation rates and slowing corporate earnings, with corporate bonds delivering good yields. Equity markets remain volatile, even though the long-term outlook is positive.
After last year’s dismal market performance, another year of negative returns for both bonds and equities looks unlikely. Disinflation, lower interest rates, China’s reopening and the transition to renewable energy will sustain returns going forward.
The force and speed of monetary tightening may have been a shock but with the conditions for inflation easing, we are close to a peak in the interest rate cycle. As yields rise, the outlook for bonds will improve, while the peak in rates will also be good news for the equity market.
Central bankers who might be seeking credibility by raising rates more aggressively to fight inflation mustn’t lose sight of the macroeconomic picture. While a soft landing for the world economy is unlikely, central bankers can help avoid a deep recession by easing off policy tightening soon.
The end of quantitative easing could turn out to be a good thing for bond investors as low or negative yields could be a thing of the past. With higher yields, there is more chance that bonds will perform positively when riskier assets such as equities are falling in price.
We may be near the end of the interest rate cycle after the Fed’s aggressive ‘front-loading’ of rises. As imbalances created by the pandemic and disruptions caused by the war in Ukraine recede, lower inflation can be expected.
The US is feeling the worst effects of the global market downturn, with debate now turning to how bad a recession may be. Earnings growth in the Asia-Pacific is more stable than in the US, and expectations for 2023 are positive.
A strong US dollar is driving inflation and slowing growth in emerging market economies as trade becomes more expensive. Only when Fed hawkishness affects US growth expectations will dollar demand begin to ease, but the peak may still be a way off.
Asia faces higher energy prices like the rest of the world, but in the long run this will accelerate its transition to green energy. Falling prices for renewable energy projects combined with firm climate commitments will drive more power generation from renewable sources.
History suggests that if investors take a long view, returns will be positive through the tightening cycle. Furthermore, inflation is likely to peak in the next few months, and the medium-term outlook for equity returns should be healthy.
With the Omicron wave likely to peak soon, life might be returning to normal, albeit with adjustments. Most importantly, social restrictions including those on travel will gradually be lifted, with massive positive knock-on effects on economies.
The prospect of increased interest rates to combat rising global inflation may have caused a jump in short-term bond yields, but the longer outcome is more bleak. The reality is that yields have been below inflation for some time and that is not likely to change soon.
As carbon pricing becomes more widespread, global collaboration is needed to avoid carbon dumping and tackle broader economic implications such as inflation.
Energy demand is rising more quickly than the availability of renewable alternatives, emphasising the need for greater investment. The trend towards net-zero carbon will touch all parts of the economy, as shown in areas such as electric cars and ‘green steel’.
What happens to Treasury yields will signal how the environment is changing and what will happen to global interest rates, credit markets and more. If the Fed waits longer before it starts to taper its asset purchases, yields could quickly move lower.
Although Asia has underperformed the US and Europe since the first quarter of this year, current valuations are supportive of Asia’s stock markets. On the whole, Asia is well placed to deal with the virus and maintain strong economic growth.
The restricted use and security risks of bitcoin and other cryptocurrencies make them a poor alternative to traditional currencies, even if they could overcome widespread official disapproval. Central bank digital currencies, on the other hand, can help speed up transactions, reduce costs and improve security.
Global summits and national targets to reduce carbon emissions are gathering momentum with the mobilisation of capital in support. Investors have the techniques and data to make the right call when it comes to having a climate-aware portfolio.
After a year of restricted economic activity, pent-up demand is huge as people, firms and governments have cash to spend. High nominal GDP growth and low interest rates cannot coexist forever, but they will be a short-term boon to equity markets.
