‘Cash is king’ mentality is back: AXA IM

AXA Investment Managers’ (AXA IM’s) Chief Investment Officer, Chris Iggo, has signalled the return of a “cash is king” environment amid teetering investor sentiment and macro uncertainties.

Iggo said while there is no recession as yet and nominal gross domestic product (GDP) continues to rise, the “legacy of years of quantitative easing (QE) and the COVID-19 shock” leaves the opportunity for a global economic shock.

“On balance, recent events have highlighted the risks, but have also shown that authorities have tools to deal with these issues. This might all just tip the odds in favour of markets continuing to grind out positive returns, as they have done so already in 2023. And there is a lot of cash to buy dips,” he said.

“Parts of the financial markets where there is value – like in credit – have had the outlook tarnished by the potential for more bank-related volatility and a tighter credit environment. For non-US equity markets, where there are cheap stocks, the global earnings outlook and the correlation to an expensive US market are key considerations.

“There are some great long-term themes, but the near-term earnings outlook is problematic. More than anything, there is no consensus on where markets go next.”

Iggo also highlighted how returns have shown their ability to bounce back despite rate rises, persistent inflationary pressures and a “far from ideal” growth outlook, having recently survived a “major shudder through the global financial system” with the banking crisis.

“The counter-argument would rest on data showing the global economy to be more resilient than we thought, on China moving back to stronger economic growth, and on the markets playing a game of chicken with the central banks,” he said.

“The effects of years of QE and zero interest rates culminating with the huge disruptions from COVID-19 have led us to where we are – the other side of an inflation and interest rate shock. We hope that the adjustments in 2022 were enough and things can normalise but even today there are legacies from years of excessive liquidity growth.

“One of these is that nominal GDP growth has been strong. According to Bloomberg data, nominal GDP grew by 20% over 2021 and 2022. The total amount of money sitting in money market funds is not unusual when seen as a percentage of nominal GDP. The level of earnings per share is not unusual either when seen in the context of what has happened to nominal GDP.

“Earnings season starts soon and will be critical in suggesting how much further earnings are likely to correct. If nominal GDP keeps rising strongly, the earnings recession might be limited.”