CIO Views: Re-examining balanced portfolios, US inflation and China’s macro and market divergence
KEY INVESTMENT THEMES
China’s macro and markets divergence
Despite macroeconomic weakness, China equity markets have achieved double-digit year-to-date returns. Markets can diverge from macro trends, and in China’s case, the narrative has shifted. Sectors such as information technology - driven by breakthroughs in artificial intelligence - and biotechnology, as well as recent anti-involution efforts, have led the earnings recovery, offering significant growth opportunities. Available liquidity has also contributed to the market's re-rating. As of June, households had accumulated approximately $24trn in savings, while dividend yields have become more attractive relative to deposit rates. Meanwhile, fixed income returns have declined, volatility has increased, and with the property market remaining weak, investors have sought alternative investment avenues. This rally has driven index valuations to align with long-term averages. Top-performing stocks share attributes such as significant consensus upgrades in earnings per share, revenue, and elevated price-to-earnings multiples. Looking ahead, the key question is whether a wider range of companies can generate enough earnings and dividend growth, despite deflationary pressures, to attract more inflows, and sustain the market recovery.
Asset Class Summary Views
Views expressed reflect CIO team expectations on asset class returns and risks. Traffic lights indicate expected return over a three-to-six-month period relative to long-term observed trends.
| Positive | Neutral | Negative |
|---|
CIO team opinions draw on AXA IM investment team views and are not intended as asset allocation advice.
Rates | Fiscal and inflation concerns underpin curve steepening | |
|---|---|---|
US Treasuries | Potential Federal Reserve easing supports short end of curve but may push long yields higher | |
Euro – Core Govt. | Core rates steepening reflects policy rate probably being below neutral | |
Euro – Govt Spread | French political and budget risks suggest preference for Spain and Italy | |
UK Gilts | Markets await budget proposals on tax, but total returns remain mildly positive | |
JGBs | Steady increase in long yields adds to global concerns on bonds | |
Inflation | US inflation risks are tilted to the upside; short duration strategy preferred |
Credit | Spread volatility remains low but depends on macroeconomic and equity risk | |
|---|---|---|
USD Investment Grade | Income returns on track to make 4%-5% this year with stable credit backdrop | |
Euro Investment Grade | Strong demand for credit with stable European Central Bank interest rates | |
GBP Investment Grade | Total returns healthy but vulnerable to gilt curve volatility | |
USD High Yield | Attractive income return, with less drawdown risk than the equity market | |
Euro High Yield | Healthy income returns to potentially continue above Eurozone inflation | |
EM Hard Currency | Attractive diversifier to US credit with higher yields |
Equities | Positive momentum continues to drive new highs but macro and valuation risks remain | |
|---|---|---|
US | Earnings growth expectations continue to defy potential slowdown risks; AI theme still strong | |
Europe | Price/earning multiples have increased; dividend income and valuations more attractive vs. US | |
UK | Better performance despite macro risks, with large-cap companies less exposed to tariffs | |
Japan | Steady performance since April, with rates on hold and signs of improved global capex cycle | |
China | Technology and positive policy catalysts; broader earnings challenged by deflation | |
Investment Themes* | Long-term positive on AI and carbon transition strategies |
*AXA Investment Managers has identified several themes, supported by megatrends, that companies are tapping into which we believe are best placed to navigate the evolving global economy: Automation & Digitalisation, Consumer Trends & Longevity, the Energy Transition as well as Biodiversity & Natural Capital
Data source: Bloomberg
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Due to its simplification, this publication is partial and opinions, estimates and forecasts herein are subjective and subject to change without notice. There is no guarantee forecasts made will come to pass. Data, figures, declarations, analysis, predictions and other information in this publication is provided based on our state of knowledge at the time of creation of this publication. Whilst every care is taken, no representation or warranty (including liability towards third parties), express or implied, is made as to the accuracy, reliability or completeness of the information contained herein. Reliance upon information in this material is at the sole discretion of the recipient. This material does not contain sufficient information to support an investment decision.
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