AXA IM: Soft landing bullish for markets

AXA IM: Soft landing bullish for markets

18 maart 2024

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The soft-landing scenario is turning out to be bullish for markets, according to Chair of AXA IM Investment Institute and CIO of AXA IM Core Chris Iggo.

The soft-landing backdrop looks set to be in place until at least the US election later this year, he says. Moreover, 'if the soft-landing scenario is maintained, I would expect any setback in risk assets to be bought and the positive momentum to become broader – even UK equities might find a bid. There are plenty more boxes to tick before this becomes a full-blown irrational exuberance market,' Iggo explains.

In his latest Viewpoint CIO, he zooms in to three types of investment that are favorable in a soft-landing environment: investment-grade credit, high-beta credit and growth equities.

Investment-grade Credit

'What we observe now is that the current scenario is very positive for credit', emphasizes Iggo. 'Valuations adjusted to higher rates in 2022-2023 and return expectations are now positive. Investment-grade credit is fundamentally sound and provides an income stream that can be used to match liabilities more effectively than when yields were very low.'

While total returns from investment-grade credit were flat year-to-date, they have turned positive since mid-February. For example, US investment-grade credit is providing income returns of about 50 basis points (bp) per month, and 20-25 bp in euro credit. Carry is an attractive return in a soft-landing scenario and total returns will be boosted when rate cuts come.

Credit Beta and Short Duration

'It is also a good time for high beta credit. Stable rates and the short-duration nature of alternative credit mean most of the return is coming from attractive spread and floating rate returns linked to cash, which is stable for now', Iggo adds. 'Some credit beta assets were cheap too. So, things like Asian high yield, CCC-rated US sub-investment grade, leverage loans and emerging market credit have performed very well this year, as well as the more cash-like assets such as floating rate asset-backed securities.' Leverage is not seen as a significant concern, and private debt and equity flows continue to support leveraged capital structures. The soft-landing scenario also favors short-duration bond strategies over longer-duration bets due to prolonged yield curve inversion.

Growth Stocks

Equities are also a beneficiary, particularly growth stocks. Performance in the US equity market, especially in the information technology (IT) and communication services sectors, has been strong. The IT sector, in particular, boasts a high profit margin of 24% compared to the S&P 500 index average of 12%. 'It’s a sector with little debt, enjoying a product revolution, strong earnings growth and a significant amount of cash on collective balance sheets (18% of total assets). Higher rates have not really hurt, and lower rates will boost overall economic confidence, sustaining the trends towards greater US corporate investment on technology', Iggo emphasizes.

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