Short term uncertainties push investors towards the lower-risk: AXA IM

New market commentary from global asset manager, AXA Investment Managers (AXA IM), has revealed the asset classes that will continue to benefit from investors’ preference for low risk.

Chris Iggo, Chief Investment Officer for AXA IM’s Core Investments business, said government bonds, high quality credit and currencies like the Swiss franc and Japanese yen are set to benefit.

Iggo also highlighted the several driving forces behind current ongoing market volatility, including:

• “Change in outlook on US and global economy coming from weaker data, especially softer non-farm payroll growth in the US and the rise in the unemployment rate. This has been expected for some time but the increase in the unemployment rate is now threatening to signal a potential recessionary period in the US.
• Disappointment that the Federal Reserve has not already cut interest rates, especially given that the ECB, the Swiss National Bank and the Bank of England have already eased in response to lower inflation.
• ​Political uncertainty in the US in the wake of Joe Biden’s withdrawal and narrowing of Donald Trump’s lead in opinion polls.
• ​Geopolitical tensions especially in the Middle East where a fully-fledged conflict between Israel and Iran cannot be ruled out.
• ​Profit taking in the equity of technology companies in the US, partly because of some disappointments over Q2 revenues and earnings, although they have generally remained strong. However, a broader economic slowdown and more cautiousness amongst corporates could hit investment spending on artificial intelligence, which has been a big driver of technology stock performance.
• ​Generally, S&P 500 earnings have been solid but not spectacular, leading perhaps to some reining in of expectations for coming quarters.
• ​Seasonal trading conditions and poor liquidity could be exacerbating market moves; and
• ​Recent strengthening of the yen leading to covering of short positions, perhaps triggering sales of some higher carry assets.”

Iggo said a rate cut from the U.S. Federal Reserve or a “strong signal” that policy would ease could stabilise markets, along with a re-analysis of economic data as recession expectations are yet to be fulfilled and easing of Middle East tensions.

“Typically, we would look to central banks to restore market calm. It is not unusual for August to see this type of volatility. The underlying fundamentals for the global economy are fine, as recently expressed by the IMF. Even the weakening of the US labour market must be put in context – job openings rose recently, payroll growth is still positive, the unemployment increase may reflect temporary jobs,” he said.