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    1. Central scenarios and risks

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    jpm53690-mi-investment-midyr-outlook-2022-central-proj

     

    Mid-Year Investment Outlook 2022

    Central scenarios and risks

     

    16-06-2022

    Our core scenario looks for global growth to moderate and inflation to cool, albeit to still above-target levels over the next 6-12 months. Yet, as we laid out in the opening section, it’s more important than ever to consider the risks to our central view given elevated levels of uncertainty. Below we describe a range of scenarios for the economy and markets that we view as plausible over the coming year.

    Central Downside Upside
    Central

    Cooling growth, cooling but above target inflation

    Growth slows significantly in developed markets, but any downturn is short and shallow. Fiscal stimulus helps to offset real wage pressures in Europe. Policy support helps to stabilise China’s economy as Covid restrictions gradually ease. Inflation persists above central bank targets, but with economic activity cooling and headline inflation rates trending down from high levels. Interest rates rise more gradually than current market expectations, easing market fears of a central bank-induced recession.

    Equity markets stabilise despite earnings downgrades. Growth stock valuations face further headwinds. Long-term bond yields edge gradually higher, with credit outperforming core government bonds.

    Downside

    Global recession

    Developed market economies slow sharply as price pressures overwhelm the consumer. Covid concerns and lockdowns are extended in China. Negative demand shocks eventually lead to falling energy prices, helping to bring inflation back down but at the expense of a significant hit to growth. Unemployment rises as business confidence slumps and cooling wage growth eases inflationary pressures further. Central banks pause tightening plans given slowing inflation and in order to prioritise the growth outlook.

    Equity markets decline, but the central bank pivot provides some offset. Government bonds outperform both credit and equity as sovereign yields decline. Growth stock underperformance slows given lower bond yields.

    Stagflation

    Slowing demand fails to bring inflation down as energy supply scarcity drives prices higher. Wage costs eat into corporate margins as spiralling prices cause workers to persistently demand higher pay. Despite slowing growth, central banks are forced to tighten aggressively, given fears of inflation expectations de-anchoring, causing a deep recession.

    Worst case scenario for equity markets. Bond yields move higher with curves flattening as central banks are forced to hike more than current market expectations. Government bonds outperform equities, but all major asset classes deliver negative returns. Value outperforms growth given substantial pressure on equity multiples and elevated commodity prices.

    Upside

    Goldilocks

    A faster than expected reopening in China leads to easing supply chain bottlenecks. Despite the associated boost to demand, commodity prices remain anchored, potentially on the back of a de-escalation of the war in Ukraine. As a result, inflation falls back more quickly than currently anticipated. A degree of resilience in labour markets supports real wage growth as broad inflationary pressures ease. Central banks move ahead gradually with tightening plans without materially slowing growth.

    Best case scenario for equity markets, with strong earnings growth being delivered. Value outperforms, but with rotation from energy to financials. Equities outperform credit, and credit outperforms government bonds as spreads narrow.

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

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    Still value in value

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    jpm53690-mi-investment-midyr-outlook-2022-stagflation

    Where to hide if stagflation takes hold

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    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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