- US outperforming
- Equity divergence
- China’s competitive advantage
By Chris Iggo, CIO for AXA IM Core, BNP Paribas Asset Management; Daniel Morris, Chief Market Strategist, BNP Paribas Asset Management; Ecaterina Bigos, CIO, Asia ex-Japan for AXA IM Core, BNP Paribas Asset Management
Rate expectations
Fixed income performance has been inversely correlated to duration since the start of the Middle East conflict. The best performers have been those with limited duration, high income levels, or with inflation exposure. US fixed income has tended, in all maturity and credit buckets, to perform best. This is due to US yields being higher than in Europe, and the market expecting a more limited impact on inflation and policy interest rates. If risks around inflation, interest rates, and government finances hold, these trends are likely to persist. Despite rates being left on hold in April, the risk is that they are hiked in the Eurozone and UK.
Meanwhile, markets remain tuned to a possible rate cut in the US. For now, US high yield is attractive given its structurally low duration and the significant contribution of income to total returns. From 27 February to 24 April, the income return on the ICE/BofA US High Yield index was 1% compared to 0.8% for European high yield and 0.46% for one-to-three-year maturity US Treasury bonds. Better performance from long-dated bonds needs an end to the Iran conflict, lower energy prices, and a bullish pivot in rate expectations.
Selective support
The correlation of equity indices with oil prices has partially broken down recently. As of the end of April, Brent oil had rebounded by around 20% over the previous few weeks, while global equities were flat. There are some notable divergences, however – first, between the US and Europe. US returns have been supported by positive economic data and good results from the current earnings season. S&P 500 earnings per share have increased by 18% for the companies that had reported as of the time of writing, with encouraging breadth across sectors. This contrasts with a 9% EPS rise in Europe, which was not enough to prevent the MSCI Europe index from declining. The second divide is between tech and non-tech stocks. For example, within the MSCI Emerging Markets index, the former have significantly outperformed the latter recently.
Looking ahead, once the earnings season is behind us, investors will likely turn their attention back to the Middle East. If oil prices remain high or rise further, we could see another period of weakness in industrial stocks. Sector selectivity will be key. The technology theme, meanwhile, looks to be a sustainable trend.
China’s divergent path to technological innovation
Asian market divergence in the technology sector highlights a dynamic shift in the regional landscape, fuelled by the global artificial intelligence drive. Notably, emerging Asia’s hardware hubs, Taiwan and South Korea, are thriving due to increased demand for high-end semiconductors, largely on the back of the US’s AI capital expenditure. Meanwhile, China is actively working to establish its own technological leadership. Although recent policy reforms and domestic AI innovations like DeepSeek have spurred investment, the sector still trails regional peers in hardware domains, due to ongoing headwinds from US export restrictions.
By some estimates, China’s AI Graphics Processing Units self-sufficiency rate will rise from 41% in 2025 to 76% in 20301. As such, China is focusing on improving AI models’ intelligence without significant scaling and/or training with larger datasets. Arguably, for now, China’s AI competitive advantage sits in power, infrastructure, and physical AI. This is not merely coincidental; it reflects China’s strategic pursuit of self-sufficiency. And for investors, China’s idiosyncratic AI story – not a derivative of the US AI theme – implies potential diversification opportunity.
Asset Class Summary Views
Opinions draw on investment team views and are not intended as asset allocation advice.
| Rates | ||
| US Treasuries | = | Lower rates expectations bolstered by Kevin Warsh’s Fed appointment but risk of higher long-term rates given fiscal outlook |
| Euro – Core Govt. | = | Yields have stabilised at a higher level with the ECB pricing two rate hikes this year |
| Euro – Govt Spreads | = | 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 | + | Strong earnings growth supports the market’s resilience, with the technology sector benefiting from a meaningful derating and still-light positioning |
| Eurozone | + | High oil and gas prices remain a headwind to growth. We like banks, electrification and defence themes in Europe |
| 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. Banks remain attractive as the Bank of Japan appears closer to another rate hike |
| China | = | Technology stocks are supported by US-China decoupling. Potential for targeted stimulus, particularly in strategic industries |
| Global Emerging Markets | + | Earnings momentum in technology and materials, but tensions in the Gulf region are weighing on energy-importing Asian economies, calling for a selective approach |
| 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
Performance data/data sources: Bloomberg, FactSet, BNP Paribas AM, as of 29 April 2026, unless otherwise stated). Past performance should not be seen as a guide to future returns.
[1] Source: Morgan Stanley Research, China’s Emerging Frontiers: China’s AI Path: More Bang For The Buck, April 2026.
