Make room for a new economic order

In unison, JP Morgan AM experts reject fears of a return to austerity and declare the triumph of stable funding.

From left to right: Karen Ward, Vincent Juvins, Tillman Haller and Paola Toshi.

Gathered on the occasion of the European Summit JP Morgan Asset Management 2022, held this week in London, the strategists of the eponymous institution, whose CEO in the EMEA region Patrick Thomson reminded on Wednesday of a fundamentally conservative identity rooted in history that began in 1799 , calculated the main macroeconomic trends for the next decade and their implications for investment strategies.

“We are entering a new economic order with consistently higher inflation – it has reached a record high for the last 40 years – and higher interest rates. The question is, for better or for worse. Our answer, explains Karen Ward, EMEA’s chief market strategist with JP Morgan AM, is that if we look beyond the short-term investment horizon, overshadowed by three major issues, such as the crisis in Ukraine and the resurgence of COVID in China and the central bank’s nightmare, optimistic, cautious, okay for years to come. Three problems, the impact of which is already largely taken into account in market prices, and which in the medium term should give way to a less volatile environment conducive to a renewed fixed income contribution in the traditional 60/40 distribution of the last decade.

Cautious optimism

The Ukrainian crisis, first. Of course, she changed the game. “February 24 changed the optimism that prevailed at the beginning of the year about growth in Europe,” said Vincent Juvins, a global market strategist. “This drama, primarily human, has deeply undermined the confidence of European consumers, but their costs remain constant thanks to the savings accumulated during the pandemic.” Inflation will rise as long as the energy crisis continues, causing wage demands that fuel the vicious circle of inflation. But in the face of Russia’s vast weapons against Europe, which imports 38 percent of its gas, 23 percent of its oil, 28 percent of its fertilizers and 6 percent of its wheat, the latter can stand up to the authorities. is confirmed by the rally on the energy transition: “Unlike what happened during the financial crisis of 2008, Europe is now stronger institutionally, although it has decided to take up the climate challenge at the age of 27. This unity is reflected in the rejection of fiscal austerity requirements by some Member States, the Nordic countries, Germany and the Netherlands, as well as in the consensus on fiscal policies conducive to the implementation of renewable energy infrastructure and energy transition. . Once the conflict is resolved, Europe will offer great opportunities in green and clean technologies, in particular, so China cannot maintain its monopoly.

In contrast to what happened during the 2008 financial crisis, Europe is now stronger institutionally, determined to meet the 27-year climate challenge.

On the Chinese side, Zero COVID’s policy has completed the destruction of the momentum that had already been undermined by the announcement of restrictive rules applicable to technology sectors late last year, followed by a tightening of fiscal policy. “The Omicron version of the COVID pandemic and strict quarantine have shattered China’s view of China’s economic invincibility,” said Tillman Haller, a global market strategist. His ability to recover will largely depend on the success of the vaccination campaign, as it allows him to move from zero COVID to a “life” strategy with COVID. Removing restrictions too quickly risks overloading the health care system. Credit growth, which is a reliable indicator of economic health, seems to be growing thanks to more moderate fiscal and monetary policies. Thus, the Central Bank of China will play a crucial role in awakening China. To do this, it has much more opportunities than its Western counterparts,

Central banks, let’s talk about this, explains Paola Tosca, global market strategist: “After a long period of inactivity, central banks have become more aggressive this year to fight high and rising inflation and set inflation expectations. This is not the first time that markets have been too pessimistic about forecasting excessive risks of recession due to higher key rates. If inflation and economic momentum begin to subside, they may be less aggressive in the second half of the year than markets think. To the delight of bond markets.

Great return on fixed income?

Bonds will once again come to the fore as an element of diversification in a balanced portfolio, strategists predict JP Morgan AM. At the same time, when valuable stocks replace growth stocks, particularly those very promising but not (or not yet profitable) that investors dream of, bonds, particularly from developing countries, will re-emerge in building a sustainable strategy. next decade.