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  4. Central projections and risks

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Central projections and risks

   

Our core scenario is for a relatively robust recovery in the second half of 2021. But given the unprecedented nature of both the shock and the policy reaction we should not underestimate the risks. In our view, the main upside risk is that the vaccine is rolled out more quickly and the recovery is stronger and more synchronised globally. Our downside risk is centred on an unexpected rise in inflation which forces a more rapid withdrawal of monetary stimulus than the market currently expects.

Downside Central Upside
Downside

Inflation/ taper tantrum

Macro scenario

  • Inflation rebounds more quickly than expected.
  • Central banks stop easing, turn more hawkish.
  • Yield curves steepen causing debt burden to rise.
  • Governments taper fiscal support.
  • Companies focus on deleveraging.

Market scenario

  • Equities fall and underperform government bonds.
  • Fixed income challenged as carry trades unwind. HY losses most significant but IG also affected by change in perception of central bank backstop. Index-linked bonds outperform.
  • EM underperforms across equities, fixed income and currencies.
  • Core infrastructure and real estate outperforms.
  • Dollar strengthens.
Central

H2 robust recovery

Macro scenario

  • Activity remains weak during winter months. Vaccine rolled out in H1 allowing full reopening of economy in Q3. Growth accelerates and broadens.
  • Central banks signal intent to keep interest rates low well into the cycle and continue asset purchases through H1 at least. (US 10yr Treasury yield to trade <1.5%).
  • Brexit deal and EU recovery fund ratified.
  • Governments do not revert to austerity but do not act as major source of new stimulus.
  • North Asian growth outperforms US/ eurozone. 

Market scenario

  • Overweight to equities.
  • Real returns in government bonds challenged. Fixed income opportunities limited to IG and selective high-quality HY and EMD.
  • Rotation of cyclical Covid winners/losers (e.g. ecommerce to in-store retail).
  • Secular themes remain supportive for segments of growth and challenging for segments of value, preventing a full style rotation.
  • Asian equities and fixed income outperform.
  • Long-term opportunity for reasonably valued companies providing solutions to climate change.
  • Focus on companies that screen well on ESG characteristics.
  • Focus on alternative diversifiers and income-producing assets (macro funds, real assets).
  • Dollar weakens gradually on broad basis.
Upside

Strong, synchronised global growth 

Macro scenario

  • Medical solution is quick and easy to distribute and facilitates quick reopening in H1.
  • Pent-up demand from consumers stronger than expected.
  • Fiscal authorities announce large-scale investment packages to spur growth and reduce inequality.
  • Inflationary pressures build but not enough to deter central banks from low-rate commitments.
  • Multilateral coordination to promote trade and investment to tackle climate change.

Market scenario

  • Sizeable overweight to equities.
  • Real returns in core fixed income strongly challenged. Yield curve steepens. HY and EMD preferred.
  • Strong value and cyclical recovery, particularly financials. Small cap outperforms.
  • Europe/UK/ broader EM outperformance.
  • Dollar weakens materially on broad basis.

More key themes for 2021

  • The debt deluge means lower interest rates for even longer
  • The Covid winners/losers narrative could change
  • Asia’s decade
  • Global momentum towards tackling climate change
  • Rethinking the 60:40 portfolio
Download the full outlook

Past performance and forecasts are not reliable indicators of current and future results.

This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be taken as advice or a recommendation for any specific investment product, strategy, plan feature or other purpose in any jurisdiction, nor is it a commitment from J.P. Morgan Asset Management or any of its subsidiaries to participate in any of the transactions mentioned herein. Any examples used are generic, hypothetical and for illustration purposes only. This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit, and accounting implications and determine, together with their own professional advisers, if any investment mentioned herein is believed to be suitable to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yields are not a reliable indicator of current and future results.
 

J.P. Morgan Asset Management is the brand for the asset management business of JPMorgan Chase & Co. and its affiliates worldwide. To the extent permitted by applicable law, we may record telephone calls and monitor electronic communications to comply with our legal and regulatory obligations and internal policies. Personal data will be collected, stored and processed by J.P. Morgan Asset Management in accordance with our EMEA Privacy Policy www.jpmorgan.com/emea-privacy-policy.
 

This communication is issued in Europe (excluding UK) by JPMorgan Asset Management (Europe) S.à r.l., 6 route de Trèves, L-2633 Senningerberg, Grand Duchy of Luxembourg, R.C.S. Luxembourg B27900, corporate capital EUR 10.000.000.

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