Chris Iggo

The current peace deal may be fragile, but markets need it to be genuine. If inflation and interest rate risk moderates, bond returns could potentially be sustained at a healthy level, and equities could continue to be driven by earnings exuberance.

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Chris Iggo

Shock, adjust, continue

The Iran war started more than three months ago now. Investors spent a lot of time in March trying to define different scenarios and predict how the global economy and financial markets would react to a quick conflict; a prolonged one; or a total breakdown of functioning energy markets.

Three months on, where are we? Dated Brent – the main benchmark for crude oil – is currently trading at under $100 per barrel. It has averaged roughly $94 per barrel since the war started – double the average of the preceding three-month period.

That has been enough to send retail and wholesale energy prices higher, evidenced in inflation data across numerous economies. It has also been responsible for a move in forward interest rates – one-year; one-year forward US dollar and sterling rates (i.e. expectations for one-year rates in a year’s time) are 80-90 basis points higher than they were on 27 February; in the euro market the increase has been 60-70bp.

Stunning returns

None of this is new though. Most of the market re-pricing happened quickly. The expectation has increasingly become that a deal will be done to end the conflict, even if one has not yet been reached.

Since the end of March, returns have been positive. Fixed income assets have registered positive total returns, except US Treasuries and Japanese government bonds. Holding emerging market debt, subordinated and sub-investment grade credit and even long-duration European government bonds and gilts has been rewarded.

Interest rate expectations have even eased back. It looks as though the European Central Bank will raise rates at its 11 June meeting, but the US Federal Reserve and the Bank of England are expected to remain on hold this month.

Equity performance has been stunning. Technology stocks have led the way. The US SOX semiconductor index has achieved a total return of 79.6% since 31 March. The AI theme has become even stronger, with technology and semiconductor companies reporting strong revenues and market enthusiasm for such stocks undiminished.

That will be tested in the coming days and weeks by the success or otherwise of anticipated initial public offerings from SpaceX, OpenAI and Anthropic. Media speculation suggests that, along with Alphabet looking to raise $80 billion in new equity, these deals could raise more than $200 billion.

The AI theme has overwhelmed the Iran war’s potential negative risks. Those risks remain but markets are betting a deal to end the conflict and allow energy markets to start rebalancing is imminent.

Market based volatility indicators like the VIX and the equivalent measure of option volatility in the US Treasury market (the MOVE index) have been well behaved since mid-April.

Credit spreads are within touching distance of late February levels. In the currency markets, the dollar is trading about 1.5% stronger versus the euro and at a similar rate against sterling. Markets have been extremely resilient.

As I noted two weeks ago, the concerns about long-term government bonds have not been borne out by recent performance. For all the hysteria about gilts, the over 10-year index delivered a total return of 1.53% between the end of March and the end of May, with 73bp of that coming from income.

Gilt market performance might change after the Makerfield parliamentary by-election on 18 June, but higher yields are an enticing element of return for investors.

Deals, deals, deals

Market resilience is down to two factors; a deal to end the Iran conflict always seems to be close to hand; and the AI trade and its continued call for investors to allocate more capital.

Meanwhile, the global economy stutters on, with the latest round of purchasing manager surveys suggesting we are far from a sharp downturn in global activity.

Indeed, the US ISM manufacturing index hit a four-year high in May, driven by strength in new orders which reflects all the kit being made to build data centres and the associated infrastructure.

FIFA peace deal

I suspect President Trump would like a deal with Iran agreed before the World Cup starts next week (remember, Iran is supposed to participate). Global attention will be on the US, and the optics would be much better if Washington could tout a peace deal before Mexico and South Africa get the competition underway.

The amount of global investment capital being dedicated to AI is mind-boggling and it is not surprising that many are questioning whether it is a bubble. Certainly, public equity markets are going to be even more concentrated in technology stocks once this mega-IPO round settles. Some disruption to equity prices is possible as these re-allocations take place to accommodate this record level of new equity issuance.

This week’s news from Broadcom – revenue forecasts underwhelmed the market – reminds us that not all players can be winners. At the same time, the world can’t make enough chips, and capital expenditure continues to drive growth (especially in the US).

And the winner is…

We said at the beginning of the year that resilience was a key investment theme. So far, the global economy has remained resilient. Markets have too. Yields have reset higher but there has been no wave of defaults in credit, nor any market dislocations from investors assigning higher risk premiums to government debt.

The valuations of the AI companies planning to float, once they have gone public, will be a real test of whether this resilience persists for the rest of 2026.

By Chris Iggo, Chief Investment Officer

Performance data/data sources: LSEG Workspace DataStream, ICE Data Services, Bloomberg, BNP Paribas AM, as of 4 June 2026, unless otherwise stated). Past performance should not be seen as a guide to future returns.

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Chris Iggo

Jobs and business models are at risk from artificial intelligence disruption. That is spooking markets as it is difficult to put a valuation on companies that could be vulnerable to the onset of AI. At the same time, huge amounts of money continue to be spent on data centres and computing power. As such, the technology trade has become more nuanced – for one thing, it has increasingly become a bond trade as well as an equity one, as bond investors are being called on to finance the AI boom.

• Key macro themes – Jobs data is likely to keep the Federal Reserve on hold
• Key market themes – Technology is not as sure a bet; AI is creating winners and losers

Disrupt and maybe destroy

AI is hyper-charged creative destruction. It is a technology upending economic relationships and businesses. It is disruptive and markets are seeing the implications of that in real time. As of close of business on 12 February, the S&P 500 Software and Services Industry sector was down 19.7% year-to-date and 27% since the broader Information Technology sector peaked on 29 October. In the bond market, over the same period, the US High Yield Technology sub-index has seen spreads widen by 135 basis points. Individual equities and bonds have taken bigger hits. However, in their quarterly earnings announcements, the hyperscalers (cloud computing giants) increased capital spending plans once again, while semiconductor manufacturers have reported huge increases in revenue. Despite wobbles elsewhere, the S&P 500’s semiconductor index is up 4.5% this year.

Culling the coders

The AI-enabling theme is very strong. Huge commitments to develop data centres, cloud computing capabilities and large language models are generating massive revenues for companies involved in creating the infrastructure. Goldman Sachs publishes an equity index called AI Data Centers and Electrical Equipment and that index is up 26.7% this year, and more than 100% compared to a year ago. Nonetheless, companies at risk of disruption are in an existential panic. If more powerful AI agents can perform marketing, accounting, legal and human resource management tasks quicker and cheaper than existing Software as a Service (SaaS) incumbents, then users win from lower costs and productivity gains, while suppliers see their revenues undercut. This was certainly the theme of the last couple of weeks. AI adoption will be good for margins for some, and disastrous for revenues (and share prices) for others.

However, as always, the story is more nuanced. Enterprise AI adoption is still relatively limited across the broader economy, and its growth has not been as fast as some had hoped. It takes time to replace enterprise software when it is embedded in the corporate structure. There are opportunities for big software providers to respond to AI competition by incorporating more AI value-added services into their own software applications. Customer service and business models are often based on legacy frameworks, and as such, AI agents cannot simply barge in and totally replace existing workflow management. It’s going to be interesting. But growth expectations and software companies’ valuations have been rightly challenged. This story has more to run and could end up undercutting broad US equity returns. The story in 2026 has been one of US index underperformance, with Asian markets delivering the strongest price gains.

More tech bonds

AI is disruptive in other ways. The hyperscalers have ramped up their corporate bond issuance to finance capital spending plans. The money being raised is sizeable. Two deals in the US corporate bond market raised $25 billion and $20 billion in the last week or so. The technology sector is rapidly becoming the source of the biggest corporate bond issuers. They are highly rated; they need to borrow and there is demand.

Corporate bond investors are going from generally funding highly regulated businesses like banks and utilities, to funding growth companies in a technology which is still new, and which might not deliver the revenues needed to make the current levels of spending viable.  In the short term this is unlikely to be a problem as borrowers have strong balance sheets and recent deals provide new opportunities for income-focused bond investors. For sterling investors, starved of issuance in recent years, the 100-year maturity bond from Alphabet, representing an additional 1% of long duration credit assets in the market, was a welcome source of coupon payments (6.125%).

In the US market, the spread on the ICE BofATechnology and Electronics bond index above US Treasuries has risen to match the overall market spread after being tighter for the last decade.

Disrupting jobs

Another area of disruption is employment. If AI can do things quicker than humans, and carry out tasks too complex for the human brain, then why employ a person and not a machine? The extent to which this is happening today is hard to assess. In the asset management world, reporting on portfolio performance – an extremely important service offered to clients – might mostly be done by machines.

The cyclical position does not point to near-term Fed rate cuts

Overall US jobs growth has been weak. Both official and household surveys of employment show flat growth compared to a year ago. Despite this, the January employment report was better than expected. The number of non-farm payroll jobs increased by 130,000 compared to a revised 48,000 in December and a market consensus expectation of 65,000. The unemployment rate also fell to 4.3% from 4.4%. The Fed’s three rate cuts last year were based on policy having proven too restrictive and a rising unemployment rate (it was 4.0% in January 2025). However, in January the unemployment rate fell to just below the estimate of the natural rate of unemployment (i.e. the unemployment rate estimated to be consistent with a stable inflation rate). There is a scenario in which the Fed could remain on hold for some time which may see market yields resume the upward trend they were in between October and December last year.

By Chris Iggo, Chief Investment Officer for AXA IM Core Investments at BNP Paribas Asset Management

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Performance data/data sources: LSEG Workspace DataStream, ICE Data Services, Bloomberg, BNP Paribas AM, as of 12 February 2026, unless otherwise stated). Past performance should not be seen as a guide to future returns.

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Chris Iggo

Recession proof (?)

Recent global equity market price momentum has been strong despite ongoing policy uncertainty, escalated military conflict in the Middle East, and lower consensus economic growth forecasts. A US recession – a scenario which might lead to a significant shift in asset price performance – remains a low probability event. A lot of observers find this puzzling. Since the pandemic, real disposable income growth has been anaemic in aggregate (less than 1% per year compared to 2.8% annualised over the past 50 years). There has been a considerable tightening of monetary policy which has made life more difficult for borrowers – the average 30-year mortgage rate is at 6.75%, compared to 3% before the Fed raised rates. On top of all that, consumers are paying higher prices for imported goods.

More or less equal

The US is an extreme. The Gini coefficient is a measure of income inequality with a coefficient of zero indicating perfect equality and 1, absolute inequality. The World Bank provides an income inequality estimate based on the Gini methodology and a scale of 0-100. For 2023 the measure was estimated at 41.8 for the US. Countries with a higher measure (greater inequality) include places like South Africa (63.0), Brazil (51.6) and Turkey (44.5). Those with lower measures (more equality) included the UK (32.4), France (31.2) and Norway (26.9). With more income equality, a shock to real incomes (like the energy price shock in Europe in 2022) tends to have a broader and more aggregate impact. Germany’s decline in real GDP since 2022 is in part explained by this, although there are clearly other factors. The current US budget proposals, if anything, will merely entrench further income inequality, keeping the US economy highly leveraged to financial markets and the ability to sustain super profits in technology. In an unequal society, a rising tide does not necessarily lift all boats, but in a more equal one, a sudden deluge can sink them all. The policy model in Europe’s socially-democratic environment tends to address inequality and the challenge is to balance that with stimulating growth. In the US, the policy model tends to boost growth but paper over the inequality with populist promises.

Momentum is positive

Most of the time we are not in recession and the positive feedback loop in the US supports strong equity returns and economic growth. The accumulation of that is a stock market with much higher valuations than anywhere else, aided by its own positive dynamics attracting money in from the rest of the world. Latest readings for a measure of equity index price momentum, based on one-month and three-month changes, puts US indices towards the top of an international comparison (22 different indices) with only Korea and Israel topping the US. This measure recently turned lower which may indicate some underperformance of global equities for a while – subject to sentiment of course, which appears forgiving to policy shenanigans.

But valuations are rich

I’ve talked a lot about valuations and in our market strategy at AXA IM we always try to balance the impact of valuations, with macroeconomic factors, sentiment and technical influences on the market. Often, it is the case that valuations are high for certain asset classes because the macro (or broader fundamentals such as profits and leverage) is also positive. I looked at a range of valuation metrics for rates, credit and equities and calculated normalised scores for them relative to their distribution over the last 25 years – real rates, curves, credit spreads, price-earnings (PE) ratios and dividend yields. Not surprisingly, there are few assets flashing cheap. The cheapest ones are mostly UK – equities, long-end government bonds, real rates and overall credit yields. But when we think about the macro backdrop to the UK – Brexit, anaemic growth, persistent inflation and fiscal deterioration – it’s no wonder sterling assets are cheap. Away from the UK, European equities (dividend yields) and real rates score reasonably well.

Politically pricey

No surprise either for what flags as very expensive – US equities and credit spreads in general. Exceptionalism is priced in, with earnings per share growth required to be even higher than current analyst consensus forecasts to justify the current price-earnings multiple (never mind allowing the PE to revert to its longer-term average). The current political push to lower taxes and regulation favours a return to capital rather than to labour, extenuating income inequality and raising the firepower of those higher income cohorts. It’s uncomfortably hard to see how this all stops. Recessions have always led to lower profit margins and earnings, but the US seems to have become more resistant to recessions. Meanwhile, the rest of the world is dogged by sluggish growth, structural brakes on investment and innovation, and political systems that are weighed down by debt. The US is also becoming fiscally burdened, but the constraints are less because the rest of the world finances the US and in return the leveraged, socially unequal machine continues to generate growth. I don’t understand why Trumpism wants to throw sand in the machine.

Trump and market concerns (again)

However, this week’s round of tariff threats and Trump’s consistent attacks on Fed Chairman Jerome Powell, could backfire on the US. Inflation break-evens are starting to move higher – the five-year/five-year inflation swap rate has continued to move higher, the dollar is weakening again, even Bitcoin is testing new highs. The minutes from the Fed’s June 17-18 meeting clearly articulate the broad concerns about inflation moving higher, even if the tariff impact is temporary. Investors should be concerned that after supporting a budget which will add trillions to the US’s outstanding debt, President Donald Trump is pressuring the Fed to cut rates to reduce the cost of financing that debt – something which economists call “fiscal dominance”. The risk is higher yields, a weaker dollar, higher inflation, and eventually, credit and equity valuation corrections. Long credit is a very strong consensus, and as a Bloomberg article suggested this week, more and more of that is being expressed in a leveraged way through the credit default swap index market. The risk of an extended move – e.g. around tariffs or the Fed – is rising. After strong risk momentum, it might be time for tactical investors to potentially take a more cautious approach again.

Performance data/data sources: LSEG Workspace DataStream, ICE Data Services, Bloomberg, AXA IM, as of 10 July 2025, unless otherwise stated). Past performance should not be seen as a guide to future returns.

By Mr Chris Iggo, Chief Investment Officer, Core Investments

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All figures, as at end of December 2024.
Notes:
[1] All ETF data as at 31 May 2025 – source: ETF Book
[2] JP Morgan Global Government Bond Index / ML Global High Yield Index / Source: FactSet as at 26 June 2025 in US dollar terms
[3] LSEG Workspace DataStream, ICE Data Services, Bloomberg, AXA IM, as of 26 June 2025
[4] S&P 500, Nasdaq close at record highs, cap best quarter in over a year | Reuters
[5] LSEG Workspace DataStream, ICE Data Services, Bloomberg, AXA IM, as of 26 June 2025

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Chris Iggo

Investors await clarity on US policy

US policy uncertainty and its outlook implications remain front and centre. In the case of adverse outcomes, US assets remain most at risk, given the threats to growth, inflation and interest rates.  Markets reflect this with US equities and long-duration bonds underperforming in 2025. Over the summer there could be more policy clarity.  Investors should be prepared for a meaningful level of import tariffs and a budget that underscores medium-term fiscal sustainability risks. In fixed income, short-duration strategies have endured less drawdown and delivered positive year-to-date returns. Resilient fundamentals should help sustain credit assets’ performance with limited interest rate risk. Being at the centre of the trade war; US and greater China equity indices have performed poorly. Few countries are exempt from trade risks but equity markets with the lowest valuation multiples should fare better as uncertainty persists. The UK, Canada, Australia and Eurozone have the lowest drawdown risks given current valuations.

Central bank policy: Same shock, different answer

The pandemic reminded us that monetary policy is not well equipped to face economic asymmetries. For decades, the standard model has somewhat dodged the supply side issues in the economy, prioritising demand stabilisation instead. While the European Central Bank’s (ECB) Strategy Review will supposedly address this key issue, responses may vary. The Federal Reserve (Fed) is confronted with a US trade policy asymmetric shock, although the consensus was already expecting higher inflation and slower US GDP growth even before Liberation Day. In contrast, the ECB is facing a symmetric shock, i.e. slightly lower growth and inflation, which is easily manageable with standard tools. Therefore, the Fed’s reaction should differ from the ECB’s, at least in theory: Fed policymakers should carefully weigh costs and benefits of targeting price stability rather than full employment and vice versa. Against this background, markets believe that both the Fed and the ECB are likely to continue cutting rates during 2025.

Foreign flows into US credit: A pause rather than reverse

Concerns over foreign investment in US dollar credit have recently emerged, driven by the deflation of US exceptionalism narrative and the substantial appreciation of Taiwan’s dollar. A flood in US dollar supply, alongside limited demand drove the move, as investors returned to home equity markets and exporters repatriated deposits. Data shows that historically there has been no structural relationship between the US dollar and foreign investors holdings of US corporate bonds. Instead, other factors play an important role in driving foreign demand, such as global savings supply and limited competing domestic investment alternatives. For Asian investors, challenging foreign exchange (FX) hedging costs are not new, however US dollar credit purchases from life insurers could ease if they’re faced with headwinds to sell US dollar-denominated policies. Increasingly so if local investors think the dollar is overvalued, and more losses could be ahead. Equally, an FX hit to earnings could constrain insurers’ ability to continue to deploy capital into US dollar credit.

By Chris Iggo, Chief Investment Officer, Core Investments

The post Uncertainty continues to dictate outlook appeared first on AdviserVoice.

Chris Iggo

The global geopolitical and economic discourse has become confrontational. This creates uncertainty for investors. Sentiment is volatile. Away from the noise, net market returns are nothing special. The trade war, whichever way it evolves, is a macroeconomic shock but the reality is less harsh than the rhetoric. Year-to-date equity market returns are positive, and some markets are up a lot. Meanwhile, overly dramatic concerns about government bonds have not altered the fact that bonds are delivering income to investors. Balanced portfolios are doing all right. Keep the poise, ignore the noise.

Fight, fight, fight

The US administration’s prevailing philosophy is to restore the American greatness concept. That implies a confrontation towards those that are perceived to be preventing this greatness from manifesting – foreign governments and institutions, immigrants, and those that have pursued a progressive policy agenda domestically. For markets, the most important manifestation of this confrontational approach has been trade policy and the attempt to reshape the global trading system in America’s favour. By now we are familiar with the unorthodox and unpredictable way the agenda is being pursued, and how this creates volatility in investor sentiment and market prices. For the near future, the US will keep fighting for better outcomes on trade, will back a budget that widens the Federal deficit, and pursue defunding research in areas such as social equality, health and climate risk that do not align with the MAGA agenda. The risks of self-inflicted economic damage are clear.

Sentiment

How will we know when America is great again? It is unrealistic to assume that the Administration will settle for less than the blanket 10% tariff, with other specific sectoral and China focussed taxes. A confrontational approach by the Administration is likely to be the modus operandi, at least until the mid-term Congressional elections in 2026. As such, investor sentiment is likely to be volatile and markets are likely to be directionless.

Domestic versus foreign

There are likely to be differences in sentiment towards investing in the US between domestic and foreign investors. Antagonism towards the rest of the world is core to the agenda. The antagonism surely feeds into asset allocation decisions regarding US assets, as the US loses empathy internationally. The policy approach creates uncertainty around US economic fundamentals such as growth, corporate profits, inflation, interest rates, and the dollar. On balance it tilts investors to more of a home country bias.

It is the politicians, not the CEOs

It is not corporate America that is causing the uncertainty, it is political America. US markets are expensive but have demonstrated strong earnings, forecasts for which are still in double digits for this year and next. Markets are supported by domestic investors where sentiment does not seem to be as bad (there will be some sympathy with the MAGA agenda). There is no recession, there is plenty of liquidity in money market accounts and technology is moving quickly. Some element of US exceptionalism remains in the stock market. Balance and diversification are the key for foreign investors. A lower desired level of exposure to the US market given valuation and the other macro risks may be the result but it does not mean the US is a no-go.

Fixed income trendless

The key risk to Treasuries is that higher coupons on newly issued debt are going to be needed to attract additional buying as deficits get bigger. This pushes up market yields and pushes down prices on existing bonds, leading to negative price returns in bond portfolios. For foreign investors in US bonds there is also a fear that the real value of their holdings could be eroded by higher US inflation and an even weaker dollar. Despite the unorthodox streak running through Washington, there has been no suggestion that they are going to monetise the debt and inflation away the problem of fiscal sustainability. US Treasury Secretary, Scott Bessent, for one, recognises that the inflation of 2021-2023 was driven to some extent by the Fed’s balance sheet policies super-charging quantitative easing. That is not a policy choice today. However, it is safer to stay in short-duration fixed income strategies given the volatility of yields at the long end of the curve. Short-duration credit in investment grade and high yield remains a sweet spot in this uncertain world.

Risks are higher. Risk premiums are higher. Further episodes of intense market volatility (with the Pavlovian responses from the commentariat) are likely. The world is changing but market capitalism is not dead; it is just the mechanisms are being shook-up. That creates uncertainty. But fundamentals are still solid for global markets and the level of confrontation from the US Administration will recede eventually. As such, long-term returns from balanced, diversified portfolios with a solid exposure to income flows from credit, and earnings growth from technology, should continue to see wealth grow.

By Chris Iggo, Chief Investment Officer, Core Investments

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Chris Iggo

Markets are back to where they were before 2 April. Economists thought a recession was a sure bet but are not so convinced now. Investor sentiment – or at least market momentum – has been very positive. The thing is, we don’t know quite how the macroeconomic outlook has changed. It is surely worse in terms of growth and inflation, at least for a while. But US equity markets are back to their valuation highs. It’s that time of year that evokes the old saying “sell in May and go away”. Or at least tilt towards credit.

Fear or greed – Investors will have had differing experiences during the last six weeks. Those who did nothing will have done fine. However, if investors took the rational decision to reduce equity weightings and, specifically, reduce US exposure, the results will have been mixed given the voracity of the equity market rally since 9 April. The market timers will have done best if they were able to sell on the tariffs and buy on the pause. Being closely tuned into the particular modus operandi of the Trump Administration will have helped.

Tariffs up, growth down – I’m not sure that I have seen such swings in sentiment amongst market participants and economists. Based on what we know today, tariffs are going to be historically high. This will impact trade flows, supply chain dynamics and business planning. American companies relying on imported consumer goods for resale or industrial inputs will be paying higher prices and still might not have the certainty they require to plan output and investment, or the ability to maintain profit margins. China might be celebrating a ‘win’ over the US, now that Trump has taken down tariffs, but they are still going to be high. This will affect Chinese exporters’ volumes with potential negative implications for employment and output, not to mention raising US consumer prices.

In our macro, valuation, sentiment and technical framework for assessing asset return prospects, the macro outlook is worse than it was. The only meaningful factor that has improved is sentiment, driven by announcements of “trillions of dollars” of deals done by Trump. Sentiment is fickle though. It could turn sour when the reality of weakening economic data becomes evident.

US equities are very expensive again. Those with sympathy for the MAGA ambitions and methods could believe US exceptionalism will continue to deliver high returns, with strong capital inflows representing a willingness to hold and increase dollar holdings amongst investors in the rest of the world. Recent events might cast some doubts on those assumptions. Perhaps selling semiconductors and airliners to the Gulf will supercharge the US expansion for another few years.

Bonds are ok – In the bond world, yields are still attractive, especially in credit. Looking at where credit indices are compared to their 20-year history, yields are generally in the third quartile of their distribution, while spreads are in the second quartile. Credit spreads are modestly expensive, but yields are on the cheaper side of average given where we are in the monetary cycle. US and UK credit markets offer the most attractive yields and returns in both markets should benefit from central bank easing over the next year.

Between two and three – Bond investors will have some concern about inflation. But the news has been good recently. It still looks like it will be difficult to get inflation to, or below, 2.0% with annual inflation rates seemingly stable at current levels in the US, Eurozone and the UK. There is also upside risk from the tariffs. Having some inflation-linked bond exposure alongside other higher yielding assets could be helpful to portfolios, capturing inflation accrual and some potential benefit from lower real rates as global monetary easing continues.

Value versus value creation – I think there is more uncertainty for investors and the global economy to face. A decade ago, the US was about the same as the UK. Now it is twice as valuable relative to GDP. Since the global financial crisis, the ratio has gone one way, with a slight interruption to the trend during the pandemic.

Various policy puts from the US government and the Federal Reserve; the monetisation of fiscal expansion; and the rapid growth of the technology sector have created the exceptional rise in equity valuations, helped by the confidence that the rest of the world had in investing in the US. Now the market is very expensive, and perceptions might have changed. There has not been enough time since the tariff debacle for the real economic data to show whether any damage has occurred. Anecdotal evidence suggests there has been some. It might be time to “sell in May” just in case this does come through.

By Chris Iggo, Chief Investment Officer, Core Investments

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Chris Iggo

International travel is returning to near pre-pandemic levels, highlighting the sustainability challenges for the sector.  

Policymakers are taking decisive action to reduce emissions from transport while new technologies are popularising alternative methods of travel, and helping decarbonise existing ones. 

Together, the combination of new policies and technological innovation is creating a wave of long-term investment opportunities.

International tourism is expected to have returned to almost pre-pandemic levels this year, but this poses something of a conundrum. How do we combine the economic and wider benefits of travel with the increasing urgency of the need to tackle climate change?

The answer, quite clearly, is decarbonising methods of transport and travel – but while the answer is simple, the process of getting there is not. However, this journey towards lower carbon travel is underway, and creating potential new opportunities for investors now and in the future.

From electric vehicles and sustainable aviation fuels to micro-scooters, we have seen a wave of innovation in the transportation sector over recent years, with new technologies popularising alternative methods of travel, and helping decarbonise existing ones.

Governments and policymakers are also taking drastic action in a bid to reduce emissions – France has banned short-haul flights where train alternatives exist, while the Netherlands has limited the number of flights at Schiphol airport, a key travel hub.

But governments don’t want to put the brakes on international travel and tourism – a sector that contributed 7.6% to global GDP last year and created 22 million new jobs.

For many countries, attracting hordes of foreign tourists is vital to their economy.

However, travel and tourism accounts for between 8% and 11% of total global carbon emissions, according to varying estimates – which is almost certain to increase as travel activity is predicted to surge by 85% from 2016 to 2030.  

Passenger cars are the largest contributor to transport sector carbon emissions, at 39%, followed by medium and heavy trucks (23%) and shipping (11%). Rail travel accounts for just 3% of emissions.

Low-carbon fuels

Mile for mile, flying is the most carbon-intensive method of travel – the aviation industry is thought to be responsible for around 5% of global warming. It is therefore a key sector where investors can look to direct capital towards companies driving progress. Decarbonising air travel is highly complex, but experts are looking at everything from fuel and manufacturing to aircraft and airport design.

Many airlines have already made commitments to using sustainable aviation fuel (SAF). A biofuel with similar chemical properties to conventional aviation fuel, SAFs have potentially sharply lower greenhouse gas emissions – but are currently expensive and hard to come by.

This may change in future as the US Inflation Reduction Act includes subsidies for SAF production while the European Union is reported to be considering setting SAF usage targets from 2030 for any airline seeking to receive a green label.

Changing consumer preferences can also help shift the dial – a recent survey found that 40% of travellers were willing to pay at least 2% more for carbon-neutral flights. 

Another solution could involve decentralising travel hubs. For example, moving from central to regional airports helps boost local economies, bringing tourism as well as jobs to those areas, and reduces some of the strain on capital cities, which can be heavily congested with traffic and suffer from higher levels of pollution including noise.

Meanwhile the cruise industry is the fastest growing tourism sector and is expected to exceed pre-pandemic levels in passenger numbers and revenues by 2026. Cruise ships are carbon-intensive, but the industry is investing in new technologies and reducing emissions. Royal Caribbean is aiming to launch a zero emissions ship by 2035, while at the other end of the scale the Thames Clipper, the London river bus service, is going hybrid.

Electric vehicles on the rise

Cars are the biggest contributor overall to transport sector emissions, at some 39%, in part due to the sheer number of vehicles on the road. Governments around the world are putting in place new policies and targets to reduce emissions, such as banning the sale of new petrol and diesel cars in the Eurozone and UK in the coming years, while India aims for all two and three-wheeled vehicles, including auto-rickshaws, to be electric by 2025.

Sales of electric vehicles (EVs) are expected to rise 35% this year, and as well as the EV manufacturers themselves, such as Tesla, there is scope to invest in companies that make batteries, parts and charging infrastructure for electric vehicles and more.

Reducing the number of cars on the roads is also another step towards lower carbon emissions. Ridesharing potentially reduces the need for car ownership, particularly in cities, and opens up a new swathe of companies for investors to consider – but a recent study suggests it is pricing that makes the difference between whether ride sharing reduces or increases emissions.

Rail travel has one of the smallest carbon footprints of transport methods, but passengers remain at the mercy of timetables and set routes. However, companies in this sector are harnessing technology to improve their services and appeal more to customers – for example using e-tickets to reduce paper waste and making emissions data more accessible to allow them to understand the carbon impact of their journey.

And while artificial intelligence has had mixed press recently, there’s no doubt it can be helpful in certain areas – in transport for instance, companies are using artificial intelligence and cloud computing to deliver smarter timetables to meet changing customer demand.

Meanwhile electric trains and trams harnessing new technologies including automation can provide low carbon alternatives in cities and new urban developments. The global connected rail market is already estimated to be worth over $92bn and to reach over $143bn by 2030.

At the smaller end of the scale, we are seeing a surge in popularity of micro-mobility – electric bikes and scooters. The COVID-19 pandemic caused a spike in demand for these kinds of powered two-wheelers as an alternative to public transport.

Micro-mobility now accounts for an estimated 16% of trips globally, according to McKinsey & Company. It estimates that the market is worth around $180bn today, with the potential to more than double by 2030 to around $440bn. From e-bike manufacturers like Yamaha and Taiwan’s Giant Bicycles, to Bosch, a company perhaps better known for appliances like washing machines – but which also makes motors and rechargeable batteries for electric bikes – there are a myriad of prospective opportunities for investors to consider as the sector evolves.

Driving potential investment opportunities

The economic downturn and high inflation are likely to mean consumers are more demanding when it comes to spending their money on leisure travel – and they are increasingly aware of the environmental impact and becoming more selective about sustainability issues when travelling.

There is ongoing impetus from governments and policymakers, which we expect to only increase as they strive to meet climate targets, both in encouraging lower carbon forms of travel and granting incentives for investment in decarbonisation.

Companies everywhere are setting sustainability targets, many including emissions from business travel, which represents nearly a third of all travel spend.27 We believe that those which are at the forefront of the transition to sustainable travel, whether directly or indirectly – such as via the infrastructure needed – are likely to benefit from increased customer demand.

As the market continues to return to, and likely exceed, pre-pandemic levels, we see scope for potential investment opportunities for those who want to play a part in the journey to sustainable travel while also seeking financial returns.

By Chris Iggo, Chair of the AXA IM Investment Institute and CIO of AXA IM Core 

The post How investors can get on board with sustainable travel and transport appeared first on AdviserVoice.

Chris Iggo

Focusing on investing in firms more conscious of their biodiversity impact should provide rewards for the planet and for investors, writes Chris Iggo, Chair of the AXA IM Investment Institute and CIO of AXA IM Core at AXA Investment Management,

The damage caused by climate change to the planet, society and economic activity is becoming increasingly obvious every year. Floods and droughts, extreme temperatures and destructive storms all bring with them tangible impacts on people’s lives and livelihoods.

Amongst many others, the financial community has long recognised the existential threat and the truth that man-made activity is responsible for the generation of greenhouse gases that lead to rising atmospheric temperatures and imbalances in the climatic system.

There is increased focus on setting policy, changing consumer habits and redirecting capital to combating climate change before it gets too late. Investors are seeking to invest more in businesses and technologies that both help mitigate the effects of climate change and adapt to them in a way that strives to achieve a sustainable future.

Asset owners and asset managers have pledged to reduce carbon emissions from their investment portfolios and ensure their investee companies deliver the reporting and strategic targets which will allow this to be achieved.

Human activity, along with the impact of climate change, has also led to increased loss of biodiversity. Growing awareness of the risks to sustainable living from degradation of land-use, deforestation as well as soil erosion, and pollution in our rivers and seas, is also starting to impact on investment strategies and corporate behaviour.

Measuring risk

While it is more difficult to put a market price on the externalities of biodiversity loss, in the same way as it is possible to price carbon emissions, companies face regulatory, customer and financing risks if they do not take care of their environmental footprint. Increasingly, investors are adapting metrics designed to assess biodiversity footprints to complement those designed to measure climate impact. These will provide greater richness to environmental, social and governance (ESG) analysis and help portfolios target better biodiversity outcomes.

The reality is that biodiversity loss is proceeding at an alarming rate and economic activity must change to stop this reaching cataclysmic levels. Economic behaviour affects the ecosystem at all stages of the value chain. Fundamentally, land and resource use can have a negative impact on biodiversity, by disturbing ecosystems, displacing species or putting them at risk of extinction.

Natural resource depletion is an obvious cause of biodiversity loss, especially when natural habitats are disturbed to make way for mining and extraction activities. The waste produced and the transportation of mined resources to different markets also impacts biodiversity negatively. More broadly, production creates waste – pollution – and uses energy, while the distribution of goods and services is also resource dependent and generates materials – such as packaging – that is harmful to the environment. Consumption and waste disposal are also activities that can impact negatively.

How investors can play a role

Understanding the interaction between economic activity and its impact on the environment, through enhanced monitoring and reporting and via scientific developments that highlight the risks of biodiversity loss, can help investors deploy capital to those businesses that employ best practices.

There are thousands of examples, such as agricultural activities that do not use pesticides which lead to nutrient leak in soil, or companies that use biodegradable or reusable packaging in the distribution of goods. Parallel to the development of technology in the renewable energy space, as techniques are introduced that have a lower financial and environmental cost, the economics of scale will work in favour of the businesses using them.

Biodiversity is lost every time trees are cut down to provide space for cattle grazing, every time a green field site is built on, and every time waste is discharged into rivers. That loss creates threats to life. Loss of forests worsens the carbon balance in the atmosphere. Soil degradation reduces crop yields. Nitrates flowing from farmland into rivers disturb the ecological balance that helps sustain healthy plant and animal life and pollutes the water supply. Changes to natural habitats that introduce alien species risks crop damage and yields.

As investors, we can do better

We can reduce the impact of economic activity through better practices and preserving habitats whilst thinking about what we really need to consume. Better food production processes from farm to fork can not only help protect biodiversity, but they can deliver health benefits which are a financial positive for society. Public education directed at diversifying diets away from eating meat could reduce the land needed for cattle grazing and the necessary feed crops, as well as reducing the generation of methane, an important greenhouse gas.

How data and disclosure can help

In the coming years, led by the Taskforce on Nature-related Financial Disclosures (TNFD) framework and metrics such as the Corporate Biodiversity Footprint, investors will have more granular data on how businesses they invest in operate, and what ‘costs’ they are imposing on our natural world. As is the case with climate change, the focus on investing in companies which are more conscious of their impact on biodiversity should provide rewards for the planet and for investors.

From an economic point of view, achieving sustainability means incorporating climate and biodiversity loss into our consideration of the cost of production. Unfettered capitalism has led us to where we are today. Climate change is threatening the ability of humans to live in certain parts of the world and to increasingly raise the cost of economic activity. Being at risk from extreme weather or needing to adapt to the worst of climate change brings potential and actual costs to businesses, therefore reducing their returns. Biodiversity loss threatens food and water supplies and the degradation of the natural environment, with consequences for health and welfare.

Regulation needs to play an increasing role. Land and ocean resources need to be protected. Costs should be imposed on companies whose activities contribute to recognised biodiversity loss. We are moving towards greater disclosure from companies which will allow capital to be allocated not only to where economic returns are the highest but where climate and biodiversity costs are the lowest.

It is clear from what is happening in the race to net zero that technological innovations can play a role in shifting the natural cost curve. Sustainable agricultural practices, more regulated land-use, the use of renewable energy, biodegradable packaging, protection of oceans and coastlines – these are all developments that can help slow down biodiversity loss. They, and other developments, provide investors with plenty of opportunities that will not only be positive for the planet but will provide potential returns as technologies that help reduce biodiversity loss take more market share.

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Chris Iggo

Higher carry in bond markets means fixed income returns should beat inflation this year.

And they are on track. Inflation continues to fall and central banks, having increased rates again in May, should be on hold for a while. This suits bond returns, as would any cuts in rates, or evidence that a recession is coming.

Equity market returns are ahead of inflation but, unlike bonds, they are more at risk from any signs of recession leading to a more pronounced decline in earnings than seen so far. A US recession and rate cuts would be nailed on if there is no agreement to raise the debt ceiling.

It probably will not come to that, but it is worth considering how investors would react if it did.

Hedging inflation

Equities have been the best inflation hedge so far this year – or rather, large-cap equities. Large companies have benefitted from the inflation impact on sales revenues while also being in a much better position to control costs than small and mid-cap firms – although US banks have underperformed for obvious reasons. This is all reflected in the performance of stock indices relative to expected inflation rates for 2023.

The NASDAQ and other growth indices have outpaced consumer price increases, as have European and Japanese equities. Small and mid-cap, as well as broad emerging market indices, have failed to keep up.

Higher bond carry

In the bond market, higher carry should allow full-year total returns to be above average inflation rates for the year. Short duration and high yield strategies have benefitted from the rise in short-term rates over the last year while longer duration strategies have seen yields fall, as markets anticipate lower inflation and interest rates going forward. Unless there is a significant weakening in credit markets in the second half of the year, fixed income returns are likely to be positive in real terms across the board.

Are we at the peak?

Investors need to see asset returns beating inflation after the dreadful real returns of 2022. The ‘preferred scenario’ for the remainder of the year is for inflation to continue to decline, which helps real returns, and for the interest rate cycle to peak soon. We had news on both fronts from the US over the past week with the Federal Reserve (Fed) moving its policy rate to 5.25% in what may be the final hike of the cycle.

In addition, there was a further decline in inflation with the headline Consumer Price Index dropping to 4.9% in the 12 months to April. However, the core inflation rate remains sticky with the monthly increase in the core index at 0.4% – a pace it has maintained for the last five months.

The risk is the Fed could still hike again, or is unlikely to rush into cutting rates, an action which is very dependent on the real growth data. As such, we are likely at the peak of the central bank tightening cycle, and that is a good reason for celebration.

Preferred outcomes

The preferred scenario could continue to see markets delivering modest real returns. Bonds do offer a potential buffer to any possible equity volatility while declines in corporate earnings could be limited by the ongoing lift to nominal revenues from residual inflationary pressures. Interest rates on hold and only modest declines in core inflation mean the macroeconomic narrative will not change that much.

For investors, there could be a reluctance to commit cash to the market in case we do eventually get a recession. A recession-induced correction in equities and credit would generate opportunities for better real returns going forward as inflation would decelerate much more quickly. At present, all of this is conjecture, as signs of a recession are still relatively limited. However, caution on equity markets is warranted.

At an aggregate level, earnings growth has turned negative. With most companies in the S&P 500 index having reported, the weighted earnings growth for the latest quarter was -4% relative to the same period last year.

Default?

There is another scenario, however. That is a US debt default. Treasury Secretary Janet Yellen has warned the Treasury might not be able to meet all its spending obligations as early as the beginning of June.

A default on US debt would be a massive shock to the global financial system – most likely leading to rising volatility, a weaker dollar, evaporating money market liquidity and a stock market crash. Faith in the US government has been a key building block of trust in global financial markets. If there is a default – and any form or size of default would be hugely symbolic – that faith could be tarnished for a long time. The repercussions would be global as well, through both global bond yields and the dollar.

Debt ceiling issues

There are already some signs of markets pricing in the non-zero (but probably very low) risk of a default.

The dollar has been weakening in the foreign exchange markets with the dollar index trading near its lowest levels of the last year over recent weeks. More dramatically, the one-year credit default swap on US Treasuries is currently trading at 180 basis points (bp) compared to an average of 10 to 15bp historically.

Growth slowdown and rate cuts

Under the worst-case scenario we need to consider slower real growth given the disruptions to aggregate demand from reduced government spending, private sector investment and consumption. There could also be negative wealth effects if the stock market corrected lower amid the chaos generated by a default. We should also consider the Fed’s response. Undoubtedly more liquidity would be required. The Fed might also have to cut rates in response to heightened market volatility and the deterioration in the growth outlook. The risk aversion would lead to lower long-term bond yields given a recession would be more likely and happen sooner than under other scenarios.

Market reset

There is a general theme that investors have acted cautiously this year and there is frustration at missing positive returns, particularly in equities, but now is not the time to use all the dry powder. Either markets keep grinding higher in the preferred scenario or there is a reset caused by a shock. The latter would suit many, given that valuations of risky assets would be much more attractive. A US debt crisis leading to rapid rate cuts and a sharp slowdown in growth would be the buying opportunity many have been waiting for.

By Chris Iggo, Chief Investment Officer at AXA Investment Managers

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