AXA IM: Bond market optimism runs into reality again

AXA IM: Bond market optimism runs into reality again

October 31, 2024

Fixed Income
Obligaties (02)

In his latest multi-asset investment views, Andrew Etherington, Head of Institutional Multi Asset & Asset Allocation at AXA IM Core, highlights the following three points:

  • Still positive on global equities: The US macro and microeconomic backdrop continues to offer a positive outlook for equity markets while financial conditions have eased this year despite an increase in yields over the last month. China’s determination to support growth and its property market is positive but more details about the fiscal stimulus are needed. The current earnings season and US election are potential sources of volatility and hence over the month we reduced risk at the margin. Nonetheless we believe the combination of our fundamental positive view of the market and more balanced investor positioning offers further upside potential

  • Favouring rate-sensitive equities in the US and Europe: We still anticipate a broadening of the global stock market rally into year-end. The likely path for interest rates remains lower although in the US the destination for policy rates may not be as low as previously anticipated

  • Patience rewarded on long-dated sovereign bonds: In the aftermath of the US rate cut, markets have re-evaluated the path ahead for US policy and yields have risen sharply, dragging European Union (EU) yields with them. We see potential value in core EU bonds and increased duration while the European Central Bank is more likely to continue to soften its monetary policy given the bleak economic prospects. Investors’ exposure to bonds has been reduced as activity data in core European countries remains weak

Historically, bond investors have either been associated with a certain pessimism or well-informed optimism while equity investors have been portrayed as eternal optimists. Recent events have challenged these notions with bond markets expressing an unusual degree of optimism.

According to Etherington, the US bond market has persistently misunderstood the Federal Reserve’s (Fed) intentions in terms of monetary policy easing. 'The most recent experience, since the Fed’s September bumper 50 basis point (bp) cut, has proven to be just another iteration of misplaced optimism in the current cycle, and the subsequent unwinding of long positioning, especially the US, has been painful,' Etherington says.

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