AXA IM: The men who sold the world

By Chris Iggo CIO Fixed Income, Axa Investment Managers

That was the week that was. Chaos in the markets and bright lights in the world of the arts going out.

Don’t you just love January? Volatility has certainly increased and with it the range of expectations about how the world economy will evolve this year has expanded.

Some call for recession and financial crisis, others say it’s not so bad and the Federal Reserve (Fed) will stick with its rate normalisation programme. One thing is for sure, financial assets are, generally, getting cheaper.

Not that I get a sense that anyone is really itching to buy. But that will come. January doesn’t last forever.

§ The man (men) who sold the world – There was one overwhelmingly negative piece of news this week. But more about Bowie later.

Compared to the transcendental importance of “A Space Oddity” or “Heroes” the volatility of financial markets is incidental.

But of course we can’t ignore it even if the only reason is that great art needs wealth creation to allow it to bloom and flourish. In reality there are more reasons – the markets are the barometer of economic health.

They are where we store our savings, where many of us make a living and where great ideas for the advancement of economic well-being are financed.

And this week the message is that there is something seriously going wrong with the global economy. With the increased volatility and the rapid erosion of billions of dollars of paper wealth comes the commentary of impending catastrophe, famine and plague.

This ain’t rock ‘n’ roll, this is genocide. The S&P500 is down 6% already this year, some European markets are down by 7%-9% and Asia is a disaster.

Investment grade credit spreads are 10bp wider while high yield in the US has delivered a -2% total return already, pushing the average yield on the index above 9%.

§ Life on Mars – I remember touring the UK in 2008 with my boss at the time, Theo Zemek. With Lehman gone and other financial institutions on the brink, we had lunch with some financial advisors and wealth managers at Rudding Park, just outside Harrogate.

The mood was not good. People were worried about what the economic landscape would be like after the crisis, with the banking system on its knees and governments having taken on masses of debt.

Theo, in her own way, said “look, when this is all over you will walk through Harrogate or York and there will be banks, shops, bars and restaurants. Life will not stop.

Some businesses may fail but growth will resume and there will be ways to make money again”.

With hindsight it was such an obvious message but when investors were redeeming assets at losses and the economy was heading into a deep recession it was not the easiest picture to paint.

Is today as bad for the developed economies? Are our financial institutions failing? Is the economy going to contract by several percentage points in the next two years?

The answer is no. We will still need oil and copper. Emerging economies are not in as bad a state as they were when glam rock was all the rage. There will be ways to make money again.

One interesting observation from the markets this year is that Treasury and other core yields have not fallen that much.

There has been something of a flight to quality but fixed income yields are so low already that bonds don’t provide much of a hedge for risky assets any more. Another way of looking at that might be that there is no signal from rates markets of impending recession.

If the US economy continues to generate more than 250,000 jobs per month then we can be somewhat optimistic on that front.

Global manufacturing might be in recession, but the broader picture in the developed world is not that bad.

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