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    1. Central projections and risks

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    Investment Outlook 2022:
    Central projections and risks

    Our core scenario is for growth to remain robust and inflation to remain above target, but not be sufficiently worrying to warrant a rapid and disruptive withdrawal of monetary stimulus. However, we remain in an unusual environment, and it’s as important as ever to keep an eye on the risks to our central view.

    The virus is still causing disruption though the combination of vaccines and better treatments make us more confident that the economic consequences will be more limited and temporary. Our key risks to the central scenario therefore revolve around how the supply side of the economy behaves. In the upside scenario supply bottlenecks, both in goods and labour markets, are resolved allowing for a ‘goldilocks’ period of strong growth, low inflation and ongoing monetary accommodation. The downside scenario by contrast would be that supply side concerns worsen, leading to an unpleasant mix of weak growth and higher inflation.

    Downside Central Upside
    Downside

    Weak growth, disruptive inflation

    Macro scenario

    • Supply problems intensify, holding back growth and leading to further upward pressure on global goods prices.
    • In developed markets severe labour shortages lead to a sharp increase in wages and unit labour costs, which alongside other cost pressures weigh on corporate earnings.
    • Energy prices continue to rise due to insufficient supply response by Opec+ and US shale.

    Policy scenario

    • Monetary: Central banks are forced to tighten policy more than in our central scenario to anchor inflation expectations, even though growth is slowing.
    • Fiscal: Rising rates and higher inflation discourage further active fiscal policy to support growth.

    Markets scenario

    • Fixed income: Bond markets are challenged by tighter policy despite weakening growth. Spreads widen on weaker growth. Emerging market debt is vulnerable to tightening financial conditions.
    • Equities: Stock markets experience a correction on weaker growth and less accommodative policy. Commodities outperform.
    • Currencies: The dollar appreciates on the back of market volatility.
    • Alternatives: Real assets provide some inflation protection. Hedge funds, particularly macro strategies, provide potential protection against falling equity and bond markets.
    Central

    Strong growth, above target inflation

    Macro scenario

    • Nominal growth in developed markets remains above trend. Pent-up consumer demand is released, focused on service sector spending. Labour markets are tight, which feeds wage inflation, only partially offset by productivity.
    • Inflation remains high in the first half of the year as energy price increases filter through and supply chain disruptions are prolonged by elevated demand. Inflation moderates later in the year but stays above pre-Covid norms.

    Policy scenario

    • Monetary: The Fed ends quantitative easing mid year, as planned. The emphasis remains on slow and gradual normalisation. The ECB tapers through 2022 but doesn’t raise rates. The BoE raises rates to 0.75% over the year. Dovish central banks, in the face of resilient growth and inflation, lead to increasing perceptions that they will need to do more later.
    • Fiscal: US lawmakers agree on another fiscal package. Although part funded, the spending is front loaded. European recovery fund disbursements turn into actual projects and activity.

    Markets scenario

    • Fixed income: 10-year Treasury yields rise to between 2.0%-2.5%. Carry assets outperform core government bonds.
    • Equities: Earnings growth offsets moderate P/E compression to lift equity markets. Value outperforms on higher bond yields and P/E compression of growth stocks.
    • Currencies: The dollar and sterling strengthen as bond yields rise but downward pressure builds as the global recovery broadens.
    • Alternatives: Private equity performs well. Real assets provide some inflation protection and withstand moderately higher rates. Hedge funds, particularly macro strategies, provide diversification.
    Upside

    Robust growth, inflation fades

    Macro scenario

    • Supply problems ease. In the developed world, workers are enticed back into the labour market, easing labour shortages.
    • Emerging markets begin a gradual recovery, easing supply challenges but without putting undue pressure on global demand. Energy prices retreat and goods prices cool as spending tilts to services. Productivity is strong, helped by capex.
    • Inflation fades back to target.

    Policy scenario

    • Monetary: Central banks remain accommodative for longer. The tightening cycle is even more gradual.
    • Fiscal: Low interest rates, and robust growth and tax receipts, reduce the pressure on government cash flows, encouraging easier fiscal policy and more government investment in areas such as low-carbon infrastructure.

    Markets scenario

    • Fixed income: Core government bond yields stay broadly where they are. Carry assets outperform.
    • Equities: Strong earnings growth, and valuations that don’t decline, help equity markets end the year even higher. Growth stocks perform better than in our central scenario, while value still rises on higher earnings.
    • Currencies: The dollar weakens as growth broadens by geography.
    • Alternatives: The environment is particularly strong for private equity and private credit.

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

    More key themes for 2022

    • Earnings won’t be eaten by costs
    • Tapering without tantrums
    • The pains and gains of the energy transition
    • Change in China
    • Finding value in value

    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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