“Don't fight the Fed” is a common saying in the market. Generally, the Fed’s take on policies is considered by some investors as an indicator of the market’s outlook. And recently, the Fed adjusted its monetary policy framework.

We share our views on three questions on the minds of investors about the investment implications of this new policy.

Q1. What do changes under the Fed’s new framework mean for investors?

• The Fed announced on 27 August 2020 it will adopt a new monetary policy framework, where it will move to an average inflation target of 2%. If inflation has been below this target, the Fed would tolerate a period of above 2% inflation to achieve this average target.
• The core personal consumption expenditures deflator, the Fed’s preferred measure for inflation, averaged 1.7% in the past five years and only rose above the 2% target for three quarters during this period.
• The Fed’s latest change in monetary policy framework is a move to leverage its credibility to boost inflation expectations. The Fed is more tolerant of inflation and holding back on tightening monetary policy, including reducing asset purchases and raising interest rates, because its most urgent task is to keep supporting the US economy.

Q2. As monetary easing persists, where could investors find opportunities in risk assets¹?

• With the Fed expected to keep rates lower for even longer, and employ a range of policies to achieve its inflation target, our constructive view on risk assets such as equities and corporate debt is reinforced.
• As growth in developed market economies stays sluggish, demographic change and urbanisation in Asia are driving long-term trends that make the region a compelling avenue for investors seeking growth opportunities.
• Asia Pacific (APAC) ex-Japan equities rebounded in the second quarter with a 18.5% gain, reversing a decline of 20.7% in the first quarter².
• A number of sectors in the APAC ex-Japan equities are also showing improving earnings expectations³.
  
  

APAC ex-Japan equities: earnings expectations by sector³

2. Source: Bloomberg Finance L.P., MSCI, J.P. Morgan Asset Management. Index used is MSCI AC Asia Pacific ex-Japan Index. Indices do not include any fees or operating expenses and are not available for actual investment. Past performance is not a reliable indicator of current or future results. Data reflect most recently available as of 30.06.2020.
3. Source: FactSet, MSCI, J.P. Morgan Asset Management. Sector indices used are from the MSCI AC Asia Pacific ex-Japan Index. Indices do not include any fees or operating expenses and are not available for actual investment. Consensus estimates used are calendar year estimates from FactSet. Provided for information only to illustrate general market trends, not to be construed as research or investment advice. Forecasts/ estimates are indicative and may or may not come to pass. Past performance is not a reliable indicator of current or future results. Data reflect most recently available as of 14.08.2020.

Q3. How do we seek to capture opportunities in Asian equities¹?

1. Optimising opportunities across sectors

Asia’s growing middle class is driving long-term demand growth across sectors, independent of the economic cycle.

2. Focusing on quality and growth

A professional investment team with local expertise and long-term experience in the region is well positioned to identify companies that we believe could benefit from Asia’s transformation trend.

Conclusion

As the US economy has seen its inflation running below target for an extended period of time, the latest shift implies the Fed is more tolerant of inflation and holding back on tightening monetary policy.

With US monetary policy likely to stay accommodative for even longer, we continue to see opportunities in Asian equities backed by long-term structural growth trends.
 

Provided for information only based on market conditions as of date of publication, not to be construed as investment recommendation or advice. Forecasts/ estimates may or may not come to pass.

1. For illustrative purposes only based on current market conditions, subject to change from time to time. Not all investments are suitable for all investors. Exact allocation of portfolio depends on each individual’s circumstance and market conditions.

Investment involves risk. Not all investments are suitable for all investors. Past performance is not a reliable indicator of current or future results. Please refer to the offering document(s) for details, including the risk factors. Investors should consult professional advice before investing. Investments are not similar to or comparable with fixed deposits. The opinions and views expressed here are as of the date of this publication, which are subject to change and are not to be taken as or construed as investment advice. Estimates, assumptions and projections are provided for information only and may or may not come to pass. This document has not been reviewed by the SFC. Issued by JPMorgan Funds (Asia) Limited.