Although the markets can still fall ‘mildly’, it is best to remain firm in this harsh climate. ‘We do not see a recession for years and there are no excesses,’ says JPMorgan Asset Management.
The stock markets plunged again on Monday, after they had already suffered heavy damage last week. Inflation in the West continues to climb, prompting central banks to raise interest rates even more sharply, putting a strong drag on the economy. When will it get better? Or does it have to get much worse first? The asset manager JPMorgan Asset Management tried to formulate an answer during a well-attended media conference in London.
“Until recently, accommodative central banks were the poster boys of the financial markets, now they are at the heart of the storm,” said strategist Vincent Juvyns. “They have no choice but to raise interest rates to dampen price increases and inflation expectations, even if doing so contribute to a slowdown in growth.”
The expensive food threatens to trigger a new wave of migrants to Europe.
The war in Ukraine has sharply increased the risks. For example, Russia accounted for 38 percent of European gas imports, and 28 percent of our fertilizers. ‘The expensive energy eats away at purchasing power, and in the future perhaps the margins of companies,’ warns Juvyns. ‘The expensive food threatens to trigger a new wave of migrants to Europe. We are very cautious in the coming months and we see the economy slowing sharply.’
Soften impact
Yet JPMorgan does not predict a prolonged recession. “In Europe, governments will mitigate the impact. Institutionally, the EU has never been so strong in fighting a crisis. Moreover, governments are reluctant to let go of debt,” says European chief strategist Karen Ward. There is, among other things, the European corona recovery fund that countries can draw on. For Belgium this is 1 percent of the gross domestic product, for Spain it is even 7 percent.
We don’t rule out an additional mild decline, but we don’t see a long-term recession that could send the indices down another 50 percent.
“The stock markets are already anticipating a significant slowdown,” Ward says. “We don’t rule out an additional mild decline, but we don’t see a long-term recession that could send the indices down another 50 percent. We are not concerned about a substantial downturn in the markets. The valuation is again more attractive. And there are no excesses anywhere, like the dotcom bubble or the subprime crisis. Towards the end of the year, central banks may take a softer note as economic indicators deteriorate and inflation moderates. For the time being, it is best as an investor to remain firm. There’s no point in timing the market.’
Catalyst China?
One of the possible catalysts for recovery could be a remonte in China. “In just 15 months, perceptions about China have completely changed,” says strategist Tillman Galler. ‘Every investors wanted to be there. Now many have turned their backs on the country, partly due to the corona lockdowns, the problems in the real estate sector and the strict approach of the tech companies. But the headwinds seem to be turning tailwinds again. We continue to believe in China’s long-term potential.”
‘In the first place, there seems to be an improvement with regard to Covid. Although I hope that China will start another large-scale vaccination campaign, especially for the most vulnerable, because the vaccination rate is very low and the health system cannot handle a pandemic. Economically, a zero-covid strategy is unsustainable. However, the adjustment may take time.’
‘Secondly, inflation is much lower than in the West at 2.1 percent. That gives the central bank the opportunity to stimulate, while tightening the reins here. The conditions for getting a mortgage have already been relaxed. And credit growth is picking up again, which in the past has always been the harbinger of a rising stock market.’
‘Thirdly, there is stimulus from the government. A Chinese who buys a new car receives a premium from the state. The government also approved new computer games for the first time in a long time, a sign that it still supports the tech sector.’
‘Finally, the Chinese stock market is cheap. In the short term, valuation is a very poor indicator of the direction of the markets, but in the long term it is supportive. Chinese stocks are trading at about 12 times their earnings, which is 20 percent lower than their long-term average. Now that the headwinds are turning tailwinds again, we see potential in China.’
bonds
JPMorgan is also seeing value in bonds. With the exit of the central banks, the traditional mechanisms in the bond market are starting to return. The markets are now taking the worst case scenario into account. We expect the Federal Reserve to ease the pace of tightening by the end of this year. This creates opportunities.’
climate
One of the themes on which JPMorgan Asset Management is investing heavily is climate change. ‘Every year, humans emit 50 billion tons of CO2 into the atmosphere. That has to go to zero by 2050, while energy demand will increase by half due to the growth in prosperity and the increase in the population’, says investment specialist Katie Magee. “It takes an estimated $140,000 billion in investment to make the world carbon neutral.”
She opts for mature companies that are already realizing positive cash flows. ‘Some technologies are very promising, but are still in a risky start-up phase, such as hydrogen. I hope it will be a game changer, but for now it is still five times more expensive than fossil fuels. We don’t invest heavily in that. We prefer to invest in companies that are already further along in solutions to combat global warming. We focus on four domains: industry, buildings, transport and agriculture.’
One of the companies in the portfolio is American agricultural equipment maker John Deere. ‘That is becoming more and more a software and data company. Via GPS and satellites, the farmer will know where to use manure or water, in order to achieve the greatest possible yield with as little investment as possible.’
Other names include building technology specialist Johnson Controls, cooling and heating equipment manufacturer Carrier Global and electrical equipment maker Schneider Electric.