Outlook 2024: Chris Iggo (AXA IM)

December 15, 2023

By Chris Iggo, CIO, AXA IM Core & Chair, at AXA IM Investment Institute

Which asset classes are most attractive?

‘The last two years have seen an unprecedented tightening of monetary policy. In 2022 this reflected the inflation shock following the pandemic and the Russian invasion of Ukraine. In 2023 it continued as central banks sought to ensure that medium term inflationary expectations remained anchored close to 2%. Market returns have been disappointing through this period. Looking forward, we are close to the apex of the interest rate cycle. The main beneficiary of this will be fixed income asset classes given that the risk premium in the interest rate yield curve has risen the most. Higher yields and three years of underperformance should mean higher returns from fixed income going forward.

Within fixed income, corporate credit is the most attractive area. Highly rated companies that issue debt are unlikely to face significant credit issues, even if the economic environment does deteriorate from here. Years of low interest rates have allowed balance sheets to be strengthened with debt profiles extended. Average interest costs remain low, even for those companies that must refinance some of their borrowing. Meanwhile, investors will benefit from the additional yield available on corporate bonds, around 160 basis points relative to government bonds. This should generate a positive excess return, which is attractive over a multi-year time horizon, because of the compounding of total yields of around 4.5%. As inflation recedes, central banks will shift towards an easier stance, benefitting investors in fixed income from some shift down in yields in 2024.’

We are close to the apex of the interest rate cycle.