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A light at the end of the tunnel – AXA IM column

Chris Iggo, CIO AXA Investment Managers Core Investments, reviews recent events surrounding the US election and vaccine development. He sees a light at the end of the tunnel, but expects the euphoria to give way to sober analysis:

“It seems as if we have reached the point where growth beyond the areas of online shopping, communication, payment systems and distribution can also be expected rationally. If all goes well, a coronavirus vaccine should allow economies to reopen fully next year. The transition from a defensive bull market to a more aggressive, cyclical market could result. What is important, however, is when social mobility will normalize again – and that cannot yet be forecast. At present, the number of infections in the United States is still very high and is still increasing. The euphoria generated by the presidential election outcome and the vaccine announcement will give way to a sober analysis of how long and continuous the road to recovery will be. While this is likely to have bumpy sections, the bond markets provide us with a good entry point to provide some protection from such “inevitable disappointments”. The decisive factor is that everyone can now see a clear light at the end of the tunnel. This has an impact on interest rate expectations. A faster return to normal could shorten the time it takes for the Federal Reserve and other central banks to tighten their policies, although that could be a few more years. Forward rates, future rates traded today, have risen and the yield curve has steepened. The portfolio for a possible more aggressive bull market should be characterized by more corporate and high-yield bonds, a prioritization of value over growth stocks and investments in investments that have become cheaper due to Covid-19.

The upswing hides crucial dynamics

The market movement in the week following the US election and the announcement of a first possible vaccine was enormous. In the brief period between close of business on Friday, November 6th – when the Pennsylvania election result was not yet known – and close of business on November 11th, the S&P 500 rose 1.8 percent. This rise, however, hides some developments that are at least as interesting: the value index outperformed the growth index by 5.3 percent, European stocks outperformed US stocks by a similar amount and Japan outperformed China by around 10 percent. In the bond segment, high-yield paper outperformed US and European government bonds by 1.3 percent. The crucial question is now whether this rotation in market leadership and the cyclical upswing driven by value values ​​will be sustainable. ”

Disclaimer: The text is a column by AXA Investment Managers. 4investors is not responsible for the content of the column and therefore does not necessarily have to agree with the opinion of the 4investors editorial team. Any liability and claims are therefore expressly excluded by 4investors!

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