Monthly Market Views: Fixed income opportunities, a positive start for equities and Japan’s economic strategy
KEY POINTS
Rates and credit returns come together in corporate bond market
Corporate bond returns comprise of risk-free yield and a credit spread, which compensates investors for taking on more risk relative to government bonds. Spreads have been in trend decline for over a decade. However, underlying yields have increased since 2022. As such, the credit spread share of total yield is at its lowest point since the global financial crisis (roughly 20% of investment grade and 50% for high yield). Our macroeconomic outlook is benign, with little expected change in underlying yields or credit spreads. High yield, which is shorter duration, is more suited to a buoyant outlook and ongoing equity performance. Any rise in underlying yields would have a limited impact on total returns. Investment grade indices, which are longer duration, would be less impacted by a deteriorating credit environment – any widening of spreads would be compensated by lower underlying yields. Indeed, as more central bank interest rate cuts are expected, investment grade returns should remain healthy, as they were in 2025. A reversion of the credit share of total yield to the historical average is not in our base case. Overall, the fixed income outlook remains positive, and credit should perform well in 2026.
Positive outlook for equities with gains spread more evenly
Equity markets started 2026 with a bang. Global equity indices rose sharply in the first few days of the year. Growing investor enthusiasm for non-US and non-technology shares has been (partially) validated so far: Emerging markets, Japan and Europe all outperformed the US. Looking ahead, we anticipate the performance gap between tech and non-tech indices will narrow, but that tech will still take the lead. The development of artificial intelligence (AI) technologies will likely continue to drive superior earnings growth, but the implementation of AI in other parts of the economy will allow companies to increase revenues and/or cut costs, driving a quicker increase in profits. Though the Nasdaq index has lagged recently, emerging market technology stocks have topped most others. Europe should do better thanks to a significant increase in government spending on defence and infrastructure, which should help offset the drag from tariffs and stiff competition from Chinese imports. Europe equity valuations are also meaningfully lower than those of US (value) stocks.
Japan’s strategic rise
2025 marked a pivotal year for Japan. The economy has emerged from a prolonged deflationary cycle, and Prime Minister Sanae Takaichi’s new administration has redirected efforts toward areas with the potential to boost long-term growth. Japan’s economic policy emphasises advancing artificial intelligence and robotics; strengthening defence capabilities; continuing corporate reforms; and implementing inflation countermeasures alongside social security reforms. The OECD has upgraded Japan's 2025 growth forecast to 1.3% and expects inflation to stabilise around 2%. As growth accelerates, surplus corporate cash presents opportunities to create new value through increased investment, higher wages, and shareholder returns. Japan's ascent is not without its challenges, however. The nation is balancing a “responsible and active fiscal policy” amid high debt levels and ongoing monetary policy normalisation. Low interest rates have kept the yen weak, benefiting exporters, but consumers have faced declining purchasing power. Geopolitical tensions and potentially higher oil prices pose additional risks. To sustain its rise, Japan has sought to evolve across multiple fronts, including increasing its strategic autonomy in areas like energy and developing domestic alternatives to imports.
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 |
|---|
Opinions draw on investment team views and are not intended as asset allocation advice.
Rates | ||
|---|---|---|
US Treasuries | Clearer path for Federal Reserve is allowing for lower yields but inflation needs to be watched | |
Euro – Core Govt. | Yields expected to be stable with European Central Bank on hold until New Year | |
Euro – Govt Spread | Income opportunities likely to persist across Spanish, Italian and Portuguese bonds | |
UK Gilts | Additional Bank of England rate cuts should be supportive for UK gilt returns | |
JGBs | Ongoing monetary policy normalisation risks higher market yields for JGBs | |
Inflation | Short-duration inflation bonds still preferred as US inflation remains around 3.0% |
Credit | ||
|---|---|---|
USD Investment Grade | Fundamentals continue to be supportive but valuations less so | |
Euro Investment Grade | Stable short rates suggest longer duration credit for higher income | |
GBP Investment Grade | Credible budget would help longer duration yields move potentially below 5% | |
USD High Yield | Macro and corporate news remain supportive despite some modest credit concerns | |
Euro High Yield | Recent rise in spreads and yields relative to investment grade creates income opportunities | |
EM Hard Currency | Macro backdrop and idiosyncratic stories sustain return opportunities |
Equities | ||
|---|---|---|
US | Fiscal, monetary policy stimulus offer support while AI adoption should drive productivity gains | |
Europe | Growth backdrop improves; positive on banks, electrification and defence | |
UK | Lower rates and more stable fiscal outlook should underpin value opportunities | |
Japan | Fiscal expansion is positive for Japanese earnings, supporting domestics sectors | |
China | Chinese tech stocks are supported by US-China decoupling, earnings growth and potential additional stimulus | |
Investment Themes* | Long-term positive on artificial intelligence and carbon transition strategies |
*We have 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
Disclaimer
BNP Paribas Group's acquisition of AXA Investment Managers was completed on 1 July 2025, and AXA Investment Managers is now part of BNP Paribas Group.
This website is published by AXA Investment Managers Asia Limited (“AXA IM HK”), an entity licensed by the Securities and Futures Commission of Hong Kong (“SFC”), for general circulation and informational purposes only. It does not constitute investment research or financial analysis relating to transactions in financial instruments, nor does it constitute on the part of BNP Paribas Asset Management or its affiliated companies an offer to buy, sell or enter into any transactions in respect of any investments, products or services, and should not be considered as solicitation or investment, legal, tax or any other advice, a recommendation for an investment strategy or a personalised recommendation to buy or sell securities under any applicable law or regulation. It has been prepared without taking into account the specific personal circumstances, investment objectives, financial situation, investment knowledge or particular needs of any particular person and may be subject to change at any time without notice. Offering may be made only on the basis of the information disclosed in the relevant offering documents. Please consult independent financial or other professional advisers if you are unsure about any information contained herein.
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 such opinions, estimates and forecasts made will come to pass. Actual results of operations and achievements may differ materially. 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. Information herein may be obtained from sources believed to be reliable. AXA IM HK has reasonable belief that such information is accurate, complete and up-to-date. To the maximum extent permitted by law, BNP Paribas Asset Management, its affiliates, directors, officers or employees take no responsibility for the data provided by third party, including the accuracy of such data. This material does not contain sufficient information to support an investment decision. References to companies (if any) are for illustrative purposes only and should not be viewed as investment recommendations or solicitations.
All investment involves risk, including the loss of capital. The value of investments and the income from them can fluctuate and that past performance is no guarantee of future returns, investors may not get back the amount originally invested. Investors should not make any investment decision based on this material alone.
Some of the services listed on this Website may not be available for offer to retail investors.
This Website has not been reviewed by the SFC. © 2026 BNP Paribas Asset Management. All rights reserved.