Make way for a new economic order

In unison, JP Morgan AM experts dismiss fears of a return to austerity and announce a triumph for sustainable finance.

Left to right: Karen Ward, Vincent Juvins, Tilmann Galler and Paola Toschi.

Gathered on the occasion of the JP Morgan Asset Management European Summit 2022, which took place this week in London, the strategists of the eponymous institution, whose EMEA CEO Patrick Thomson on Wednesday recalled a fundamentally conservative identity rooted in a history that began in 1799, failed summary of major macroeconomic trends for the coming decade and their implications for investment strategies.

“We are entering a new economic order with ever-higher inflation — it has reached its highest level in 40 years — and higher interest rates. The question is, for better or for worse. Our answer, explains Karen Ward, JP Morgan AM’s chief market strategist for EMEA, is that if we look beyond a short-term investment horizon clouded by three major issues: the crisis in Ukraine, the resurgence of COVID in China, and the central bank nightmare, optimistic, cautious, in order to for years to come. Three issues whose impact has already been largely priced in and which should give way in the medium term to a less volatile environment favorable to the resumption of the contribution of fixed income to the traditional 60/40 allocation, which has been marked by an imbalance in favor of equities in the last decade.

Cautious optimism

Ukrainian crisis, first. Of course she made a difference. “February 24 reversed early-year growth optimism in Europe,” said Vincent Juvins, global market strategist. “This tragedy, above all a human one, has deeply damaged the confidence of European consumers, but their spending remains stable thanks to savings built up during the pandemic.” Inflation will continue to rise as long as the energy crisis lasts, causing wage demands that fuel a vicious inflationary cycle. But faced with the huge weapon that Russia wields against Europe, which imports 38% of its gas, 23% of its oil, 28% of its fertilizer and 6% of its wheat, the latter could turn against the government. reinforcing the energy transition rally: “Unlike what happened during the 2008 financial crisis, Europe is institutionally stronger today, although it decided to take on the climate challenge at 27 years old. This unity is reflected in the rejection of fiscal austerity demands by some Member States, the Nordic countries, Germany and the Netherlands, as well as a consensus on fiscal policies that are conducive to the introduction of renewable energy infrastructure and energy transition. . Once the conflict is resolved, Europe will offer great opportunities in the field of green and clean technologies, in particular, so China will not be able to maintain a monopoly.

Unlike what happened during the 2008 financial crisis, today Europe is institutionally stronger and determined to take on the climate challenge in 27th place.

On the Chinese side, the Zero COVID policy has finished killing the momentum already undermined by the announcement of restrictive rules applicable to tech sectors late last year and then by tightening tax policies. “Omicron’s COVID option and strict lockdown enforcement has shattered the notion of China’s economic invincibility,” said Tilmann Galler, global market strategist. His ability to bounce back will largely depend on the success of his vaccination campaign as it allows him to move from zero COVID to a strategy to “live” with COVID. Lifting restrictions too quickly could overwhelm the healthcare system. Credit growth, a reliable indicator of economic health, appears to be accelerating on the back of more flexible fiscal and monetary policies.” Therefore, China’s central bank will play a crucial role in awakening China. To do this, he has much more freedom of action than his Western counterparts.

Central banks, let’s talk about it, explains Paola Toschi, global market strategist: “After a long period of inactivity this year, central banks have become more aggressive in fighting high and rising inflation and anchoring inflationary expectations. This is not the first time that markets have been too pessimistic about excessive recession risks due to a key rate hike. If inflation and economic momentum start to fade, they may be less aggressive than markets think in the second half of the year.” To the delight of the bond markets.

Big fixed income income?

Bonds will return to the fore as part of a balanced portfolio diversification, JP Morgan AM strategists predict. While value stocks are replacing growth stocks, in particular those promising but not (or not yet) profitable stocks that investors dream of, bonds, in particular developing countries, will return to power in building sustainable strategies, heading for the next decade .