Monthly Market Views: Equity earnings boost and Asia’s move away from oil
KEY POINTS
Tilting the balance
Equity markets have been balancing two opposing factors. The positive impulse has come from a very strong earnings season. According to Bloomberg data, through to the end of July, reported earnings for the S&P 500 had risen nearly 30%, and those results were 12% higher than forecast (compared to typical ‘surprises’ of 3% to 4%). Tech-heavy indices were even stronger. On the opposite side of the scale was the sell-off in emerging market technology stocks, renewed conflict in Iran, and concerns over rising interest rates following the arrival of new US Federal Reserve Chair Kevin Warsh. The question now is which of these factors will persist?
Earnings have not only been good, but corporate guidance has been unusually positive, suggesting support from rising profits should continue. Tech stocks bounced sharply at the end of last month, reflecting what we still see as positive fundamentals for the sector. We are neutral on US duration, with elevated forward expectations reflecting the risk of higher rates in coming months if data continues to surprise. The Middle East remains the wild card. While worst case scenarios may yet materialise, the downside risk to markets appears limited. The balance for equities, then, tips to the positive side.
Focus on income with limited duration
US and eurozone credit markets have enjoyed favourable conditions for almost four consecutive years. Both investment grade and high yield spreads are close to all-time lows, despite the ongoing presence of potential risk factors and geopolitical tensions. In particular, the high yield market continues to offer potential opportunities for investors looking to diversify away from unusually volatile and flat government bond curves. Duration can no longer be seen as a strategic instrument in a world of sequential public deficits and increasing debt-to-GDP ratios.
On the other hand, investors focused on income, limited interest rate exposure and a significantly improved rating profile may benefit from productivity gains driven by technology adoption – even amongst small and medium-sized corporations. For example, the one-to-three-year segment of the US high yield universe, currently yielding close to 7.5% with less than two years of duration, may offer potentially attractive income opportunities. In addition, it yields approximately 90 basis points more than the corresponding euro-denominated segment after hedging costs.
From oil to green energy
The oil shock stemming from the Middle East conflict has sent shivers through Asia, which relies heavily on oil imports from the Gulf region. This has prompted both public and private players in Asia to seek ways to reduce dependence on Gulf energy and accelerate the shift to renewable energy. The potential is huge because the region’s energy transition efforts are still nascent, with renewables making up a small share (about 10%, according to energy consultant JKempEnergy) of Asia’s total energy consumption.
China is at the forefront of Asia’s energy transition, having built out significant renewable capacity. It is a leader in photovoltaic power generation, which is much cheaper than coal, oil and gas, and even nuclear power. China has boosted solar capacity significantly, by nearly 300% between 2021 and 2025. This contrasts sharply with the slow adoption of solar energy by other Asian countries.
We believe there is significant scope for Asia to catch up with investment in this space. The current oil shock and the possibility of recurring energy crises are key drivers for the region to speed up the energy transition in the coming years.
Asset Class Summary Views
| Positive | Neutral | Negative |
|---|
Opinions draw on investment team views and are not intended as asset allocation advice.
Rates | ||
|---|---|---|
US Treasuries | Elevated forward expectations reflect the risk of higher rates in coming months if data continues to surprise | |
Euro – Core Govt. | Yields have stabilised at a higher level with the ECB pricing two rate hikes this year | |
Euro – Govt Spread | Limited fiscal response to Iran crisis so far with Italy and Spain in better financial position than in 2022 | |
UK Gilts | Continued underperformance on overdone inflation and fiscal concerns. Political risk may keep long-term gilt yields elevated but market rate expectations look too aggressive | |
JGBs | Bank of Japan cautious on rates hikes in crisis environment | |
Inflation | Inflation carry will be elevated through the summer; short-duration strategies potentially effective |
Credit | ||
|---|---|---|
USD Investment Grade | Spreads wider than pre-Iran crisis but subject to rates and growth risks. Short duration preferred | |
Euro Investment Grade | Yield buyers support positive technical backdrop but relative value worsening again as spreads tighten | |
GBP Investment Grade | Attractive yields for long-term sterling investors but gilts an ongoing source of volatility | |
USD High Yield | Income attractive with market shaking off earlier concerns about software exposure | |
Euro High Yield | Yields close to 6% provide attractive relative value opportunities versus investment grade | |
EM Hard Currency | Solid performance since March with attractive yields but macro risks remain | |
EM Local Currency | Scope for local rate cuts once energy outlook becomes clearer |
Equities | ||
|---|---|---|
US | Second-quarter earnings-per-share growth for S&P 500 companies has exceeded already-elevated expectations, while valuations remain supported | |
Eurozone | Supported by improving business activity; EPS revisions are also improving across a broad range of sectors – not just energy – narrowing the gap with the US | |
UK | Higher interest rates remain a drag on growth momentum. Defensive sectors are likely to fare better | |
Japan | Fiscal expansion should support domestic demand sectors but valuations have re-rated and EPS revisions lack momentum | |
China | China growth remains weak and while the potential for targeted stimulus increases, particularly in strategic industries, we await concrete measures before re‑engaging | |
Global Emerging Markets | Earnings momentum remains strong onsemiconductor and memory stocks, benefiting Korea and Taiwan, but high levels of borrowing risk a correction | |
Investment Themes | Long-term positive on AI hardware, grid electrification and carbon transition strategies |
* BNP Paribas Asset Management 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; source: BNP Paribas Asset Management
Disclaimer
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