Using correlations across asset classes, we have mapped a variety of market conditions. The current conditions point to a benign environment, which is consistent with our central scenario.
With current market sentiment bullish and the performance of risky assets strong across the board since the start of this year, investors are beginning to question what potential risks could spoil the party. We have framed our thinking of the possible outcomes using three main scenarios, which are described in more detail in our monthly investment strategy :
− Our central scenario envisages a benign backdrop of steady, if not spectacular, growth and a gradual normalisation of inflation. This in turn would lead to tightening monetary policy and a moderately positive performance by risk assets;
− A false start scenario in which market sentiment is derailed by either political risk materialising in Europe or the US, or a growth scare that would threaten the current optimistic growth prospects;
− A rates tantrum scenario which would see US Treasury yields correct sharply higher on the back of a rapid ratcheting up of inflation, driven by either anti-trade policies or geopolitical tensions leading to foreign investors selling their US debt holdings.
Source : AXA Real Estate