Macro unlikely to get much better

Current investment sentiment reflects the good economic news as well as technical behaviour of markets, with the macroeconomic situation unlikely to get much better, according to AXA Investment Managers.

The firm’s chief investment officer, Chris Iggo, said that while interest rates were seen as manageable and rich valuations, while not being ignored, were not seen themselves as reason to sell, however adding money in some parts of the market today does not look that attractive.

Following that, credit markets, in general, were expensive and the upside to returns was very limited. At the same time, technical factors might still support fixed income markets but the macro play continued to favour equity returns.   

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According to him, even though the macro outlook was positive in the assessment of risky assets, valuations were still seen as rich, particularly in credit markets which were currently seeing spreads at their lowest levels since the Global Financial Crisis. 

“The macro story is unlikely to get much better – strong growth with transitory inflation, still accommodative monetary conditions, net fiscal stimulus in many economies and this all translating to healthy balance sheets in the corporate and household sectors. As much as the macro outlook is seen as a positive in our assessment of risky assets, valuations are seen as rich,” he noted.

Iggo also stressed that the positive macro and the technical drivers of expected market performance, and the more negative valuation aspects, were the glue that held all that together is sentiment.

“Investors have cash, see an ongoing recovery and are bullish. What can burst the bubble?,” he said.

“The obvious thing is rates and inflation but that will only manifest itself if a central bank turns decisively hawkish. Related to that, the beginning of bond tapering could be a negative signal.”

Other negatives would include disappointments on earnings especially as it appeared that positive guidance ahead of Q2 reporting season picked-up.

“In short I think the argument for caution, at least with new investments, is worth considering. Markets are priced for the continuation of a scenario that could not be better constructed. Investors are living with risks that are seen to be manageable while growth and the technical set-up of our financial system is rewarding capital allocated to risk. They are also sitting on handsome returns,” Iggo concluded.

“Global savings are high and have been boosted by the pandemic so it might take government and corporate deficits to widen even more before the cost of capital really moves.  But really, a lot of the credit markets don’t offer much and the cost of underweighting credit at this stage is fairly low. Volatility is unlikely to stay this low indefinitely.”




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