Monthly Investment Viewpoint - July 2024
- 01 July 2024 (5 min read)
US bond market opportunities
Bond markets are known for offering investors potentially attractive risk-adjusted returns. But investors need to pay attention to credit spreads - the yield difference between two bonds with the same maturity but different credit ratings. Since 2023’s regional banking crisis US spreads have narrowed, allowing bonds to deliver very strong total returns. The average investment grade corporate bond spread is 100 basis points (bp) compared to government bonds, and in high yield it’s 326bp. Presently, we expect US investment grade returns will be closer to their current yield (5.0%-5.5%) while high yield could possibly deliver some 8% total return over the next 12 months.
Where do interest rates go from here?
Presently there is much uncertainty about interest rates – and about how much restriction the Federal Reserve is effectively transmitting to the economy. As such there is plenty of uncertainty about future monetary policy. Looking ahead, and with current US interest rate levels at 5.25% to 5.50% we feel that markets and investors need to be careful about pricing in too many interest rate cuts. This in turn has implications for expected returns across bond markets but is potentially supportive for short-duration bonds, which are less sensitive to interest rate movements.
Can China’s equity market match the US’s performance?
Historically, China – the world’s largest emerging market – tended to follow developed countries when it came to its equity market, especially the US. But since early 2023, it has diverged from this path. China’s post-pandemic reopening was challenged largely due to a lack of consumer spending and confidence. In contrast, strong consumer spending, supportive government policies and a technology sector surge have seen the US power ahead.
But China certainly has the potential to rebound from here - stock valuations are more attractive and supportive government policy measures are coming into place, largely supporting industrial and infrastructure upgrades. Longer term, China needs to rebalance to a more consumption-based economy.
Disclaimer
This document is for informational purposes only and does not constitute investment research or financial analysis relating to transactions in financial instruments as per MIF Directive (2014/65/EU), nor does it constitute on the part of AXA Investment Managers or its affiliated companies an offer to buy or sell any investments, products or services, and should not be considered as solicitation or investment, legal or tax advice, a recommendation for an investment strategy or a personalized recommendation to buy or sell securities. Due to its simplification, this document 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 document is provided based on our state of knowledge at the time of creation of this document. 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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Risk Warning
The value of investments, and the income from them, can fall as well as rise and investors may not get back the amount originally invested.