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    CONTINUE Go Back
    1. Tapering without tantrums

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    Investment Outlook 2022: Tapering without tantrums

    Back in 2013, the US Federal Reserve (the Fed) created a bout of market volatility in what became known as the “taper tantrum”. The question now is whether markets are in for a similarly rough ride as asset purchases cease in 2022.

    Our central expectation is that markets will avoid another taper tantrum. On aggregate, we expect global stocks to be resilient for three reasons:

    • First, and perhaps most importantly, despite elevated inflation we expect central banks to remain incredibly cautious in how they take their foot off the accelerator. Tightening will be gradual, flagged well in advance, and only in reaction to strong economic activity. In other words, interest rates across the government bond curve will remain highly “managed”.
    • Second, we expect developed world economic growth and corporate earnings to be resilient in the face of modestly rising interest rates. Households have insulated themselves from higher interest rates, in part due to lower debt levels as pandemic savings have helped consumers reduce credit card debt. In addition, the impact of rising interest rates on mortgage payments is unlikely to be as painful as in years gone by. For example, the proportion of outstanding UK mortgages that are fixed is now around 80%, up from 50% just five years ago. And more than half of fixed rate UK mortgages are fixed for five years. Similarly, US households, which traditionally fix on long-term rates, are well set. The average 30-year fixed rate on offer in 2021 has been around 3%. While the interest rate sensitivity of the household sector has improved, the interest rate sensitivity of government cash flows has deteriorated markedly. However, we don’t think higher policy rates will lead to fiscal austerity curtailing economic growth. Governments will simply accept consistently higher debt.
    • Third, emerging markets – which were the stocks most affected in 2013 (Exhibit 7) - are better prepared this time around. Tapering and higher US rates could still lead to a stronger dollar and less global liquidity, which may impact some emerging markets that are more reliant on external financing. However, India’s current account position has improved since 2013, and China, Taiwan and South Korea – which together with India make up nearly 75% of the MSCI Emerging Markets index – have strong current account positions and low external debts, and so should be less vulnerable. Therefore, we expect that if tapering proves a challenge for emerging markets this time around it is likely to be felt more in areas of emerging market debt than in emerging market equities.

    Exhibit 7: The 2013 ‘taper tantrum’ was mostly disruptive for EM

    S&P 500 vs. MSCI EM performance and US 10-year Treasury yield around the previous Fed taper

    Source: MSCI, Refinitiv Datastream, Standard & Poor’s, J.P. Morgan Asset Management. S&P 500 and MSCI Emerging Markets (EM) are both total return in US dollar. Data as of 19 November 2021.

    If we’re right, and bond yields drift higher gradually rather than experiencing a rapid spike, and if earnings growth remains strong, then rising yields shouldn’t be a problem.

    That’s not to say there aren’t any areas of concern. The key difference between today and the last time the Fed tapered is that valuations for some stocks are much higher now than they were back then. The forward price-to-earnings (P/E) ratio for the S&P 500 was 14x in the middle of 2013, compared with over 20x now.

    Extremely elevated valuations are concentrated in some growth segments of the market, which may be more vulnerable to rising rates, particularly if bond yields were to rise more quickly or more sharply than we anticipate. Growth stocks have had a “good pandemic”, in that the nature of the recession was good for their earnings. Technology companies, for example, benefited from all the home office equipment being purchased and the rapid adoption of cloud computing. But valuation uplift has also played a key role in their spectacular returns, and zero rates has undoubtedly been part of this valuation uplift. Therefore, some stocks and sectors do look more vulnerable to the risk of a more rapid repricing of bond yields, as we saw in the first quarter of 2021, when US 10-year Treasury yields rose from 0.9% to 1.75% (Exhibit 8).

    Exhibit 8: A spike in bond yields may challenge growth stocks, but benefit others

    S&P 500 sector and style performance in 1Q 2021

    Source: Refinitiv Datastream, Standard & Poor’s, J.P. Morgan Asset Management. Data as of 19 November 2021.

    More key themes for 2022

    • Earnings won’t be eaten by costs
    • The pains and gains of the energy transition
    • Change in China
    • Finding value in value
    • Central projections and risks

    The Market Insights programme provides comprehensive data and commentary on global markets without reference to products. Designed as a tool to help clients understand the markets and support investment decision-making, the programme explores the implications of current economic data and changing market conditions.

     

    For the purposes of MiFID II, the JPM Market Insights and Portfolio Insights programmes are marketing communications and are not in scope for any MiFID II / MiFIR requirements specifically related to investment research. Furthermore, the J.P. Morgan Asset Management Market Insights and Portfolio Insights programmes, as non-independent research, have not been prepared in accordance with legal requirements designed to promote the independence of investment research, nor are they subject to any prohibition on dealing ahead of the dissemination of investment research. 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 name 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. This communication is issued in the UK by JPMorgan Asset Management (UK) Limited, which is authorised and regulated by the Financial Conduct Authority. Registered in England No. 01161446. Registered address: 25 Bank Street, Canary Wharf, London E14 5JP.

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