LIVE MARKETS-Constructive environment for stocks but risks remain - Impax

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CONSTRUCTIVE ENVIRONMENT FOR STOCKS BUT RISKS REMAIN - IMPAX

There are several factors in the macro environment that create a generally constructive environment for risk assets in 2026, but there are also some significant hazards that will require a broadening out of markets to sustain upsides, according to Charlie French, CIO at Impax Asset Management in London, which has about $35 billion in assets under management.

In an interview with Reuters, French cited the number of governments and policymakers around the world pursuing reflationary policies in order to stimulate growth as a positive.

However, French said high expectations from global investors that are reflected in elevated valuations, the huge concentration in equity market performance, the struggles with affordability in the consumer economy, fiscal deficits and the resulting higher bond yields and lastly, the geopolitical environment moving to a more difficult phase after relative stability all represent significant risks.

Markets have been grappling with a global selloff among tech names of late, and more specifically, software names, on growing angst about possible disruption from AI, while major players in the AI space have been dented over concerns that the massive spending on the technology may not bear significant fruit to justify the cost, with Alphabet GOOGL.O the latest casualty on Thursday after the Google parent forecast a surge in capital spending along with its quarterly results.

"We're seeing CapEx related to the build out of AI run into kind of hundreds of billions, but the direct revenues associated with that AI capacity still runs in the kind of tens of billions," said French.

"There is a kind of mismatch within, let's say, global markets between the upfront revenue recognition of build out of AI and the return on investment of that CapEx, and I think that will remain a question mark for a very extended period."

Despite the selloff, however, French thinks there will be a reward for investors in the software space down the road if they are willing to wait.

"That sector will take probably a number of years, generally, for us to confirm who are the more resilient business models within software and those which are potentially more exposed, and in that context, the whole group is just being sold down."

"But for patient investors, where you think there is a stronger motor of the business to their client base and what the clients need, there's probably a structural opportunity here, but that will require patient, thoughtful investment," French said.

(Chuck Mikolajczak)

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