As global markets continue to undergo a significant overhaul following a decade or more of quantitative easing, several longer term trends are emerging that promise to offer transformative investment themes.
According to Axa IM’s latest market outlook, the energy transition and the shift from fossil fuels towards renewable energy, backed by government policy and spending, is a good example of a major opportunity for investors.
The asset manager is also supportive of the artificial intelligence (AI) trend. “[This] will boost productivity and growth across many sectors of the economy, including healthcare, retail, finance, education and growth,” said Chris Iggo, chair of the Axa IM Investment Institute and chief investment officer of Axa IM Core.
Adapting the asset mix
Since early 2022, investors have had to grapple with the fastest hiking cycle in history, with 10 consecutive interest rate increases totaling 500 basis points in just 15 months.
In Axa IM’s view, with structural factors at play such as the costly energy transition, realignment of supply chains, tight labour markets and high unemployment rate, inflation will likely remain elevated and central banks are expected to maintain elevated interest rates until 2024.
Against this backdrop, bond yields will generally remain higher than in recent years, in turn making fixed income more interesting. Further, with resilient corporate fundamentals, easing inflation and rates at near-peak levels, corporate profit margins will remain robust.
“The trade-off between risk and reward has become more favorable, and the relatively wider spreads allow investors to benefit from higher yield premiums,” explained Iggo. Further, he added, transition-related financing options, such as green bonds, are gaining demand.
At the same time, despite bearish investor sentiment, equity markets have shown resilience with outperformance concentrated in certain sectors and markets. The notable rotation from value stocks to growth stocks has benefitted the tech sector, fueled by innovation and AI.
“Market volatility is expected to persist for the remainder of the year, but equities are projected to deliver positive long-term returns,” added Iggo.
Positioning for the longer term
As investors look further ahead, Axa IM suggests they should focus on quality growth companies that are well positioned to benefit from secular themes of changing demographics, such as the increasing demand for healthcare, leisure, financial planning and beauty.
In addition, Iggo expects to see innovation fueling the next stage of corporate growth through increased automation driving productivity efficiency and connecting consumers to benefit from the rise in purchasing power of the middle class.
Finally, sustainability will continue to be a key area. “Investments in companies with sustainable practices create opportunities in transitioning economies,” he added.
Yet Iggo also urges investors to keep an eye out for the potential risks that a more complex geopolitical environment will bring. These include concerns over the security of energy, water, food and broader supply chains.