Every major crisis causes stock favorites to change – JP Morgan AM Column

According to the experts at JP Morgan Asset Management, major crises not only cause volatility in the stock markets, but usually also bring with them a change in favorites: The end of the dot-com bubble, for example, marked the temporary end of the dominance of growth and US stocks . The following era of value stocks and emerging markets came to a crashing end in the financial crisis. With the global pandemic, it could now be time for the next change of favorites, according to Tilmann Galler, capital market strategist at JP Morgan Asset Management in Frankfurt: “The US dollar is tending to weak – this seems to be the 10-year bull market of the greenback to come to an end, which has been strong since the financial crisis, if fundamentally expensive. After the interest rate cuts caused by the pandemic, the interest rate differential between the US dollar and other industrialized countries has narrowed again – the US dollar has lost its attractiveness as an investment currency. As the global economy begins to recover, this should accelerate the flow of capital from the US dollar to other currency areas, ”the expert explains. Experience to date has shown that a weak dollar has created a tailwind, especially in the emerging markets. “Since many Asian economies are currently fundamentally convincing, the prerequisites for us to be at the beginning of an Asian decade are very promising,” said Galler.

Growing middle class, regional free trade zones, successful fight against pandemics

There are numerous short- and long-term arguments for this. It is estimated that the middle class in Asia will grow by one billion people over the next ten years. According to Tilmann Galler, this promises enormous growth in consumption and the regional domestic market. The latest agreement on the new RCEP free trade area should also further strengthen the Asia-Pacific region, as it should promote regional trade between the countries and should deepen the value chains within the 15 contractual partners.

But there is also optimism for Asia from a short-term perspective: the North Asian economies of China, Korea and Taiwan, which represent the majority of the investable universe, were more successful in containing the pandemic than the rest of the world. The new infections with COVID-19 were only a fraction of the other regions, even at their peak. “Because of the limited outbreak combined with rigorous contact restrictions and tracking of chains of infection, the virus has been pushed back enough to allow the economy to recover on a broad basis. China’s economy has now returned to its pre-crisis level – a state that Europe and the USA can only dream of up to now, ”states the market strategist.

Despite the steadily growing consumption, the Asian economies are still very dependent on the dynamism in manufacturing and trade. But what was still a penalty in the years of escalating trade conflict is, according to Tilmann Galler’s analysis, an advantage in the current phase. “The manufacturing industry is much better able to adapt to the pandemic environment than, for example, the service sector. And so the currently relatively better development of the manufacturing industry compared to the services for Asia has a very positive effect, “explains Galler.

Economic data in China positive, but limited demand impulses

China’s demand in particular has recovered significantly since the 2nd quarter of 2020. According to the capital market expert, increased prices of copper and iron ore are a clear indication of this and should also convince those who tend to distrust economic data from the Middle Kingdom. Nevertheless, one should slow down the euphoria a little. “This time, Beijing provided the economy with only relatively moderate support compared to the earlier weak phases, when there was enormous credit expansion. In other words, the positive demand impulse from China does not have the strength, as it did in 2009 or 2016, to stimulate economic growth worldwide, ”says Galler. Concerns about future financial market stability have deterred decision-makers from opening the money. The consequence is that only those countries with intensive trade relations with China should benefit from the increasing demand in China. Exporting economies like Taiwan and Korea deliver over 25 percent of their exports to China and are likely to feel the strongest tailwind for their economies. Japan supplies around 20 percent of exports to China, but the total share of exports in GDP is only 13 percent – in Korea it is 33 percent of economic output.

According to Tilmann Galler, the valuation of the Japanese stock market has reached a very attractive level compared to the industrialized countries. In the event of global success in fighting the pandemic, the rebound in the Japanese economy could also lead to a strong rebound in Japanese stocks. An above-average development would be possible if the yen does not become too strong in this scenario.

Asian stocks still have potential – but a differentiated view is necessary

According to Tilmann Galler, Asian stocks still have the potential to outperform despite the good price development. “In our long-term earnings estimates, the Long Term Market Assumptions, which are published annually, we expect an excess return of more than two percent per year over industrialized market shares over ten to 15 years,” emphasizes Galler.

However, it is important to differentiate between Asian stocks – because the pandemic has split the stock markets in Asia. North Asia has so far mastered the corona pandemic better than most other countries in the world. For this reason, corporate profits were more stable and the economy was able to recover more sustainably than, for example, in Europe or the USA. The risks of new pandemic waves and further lockdowns are therefore much lower for this region in the new year than for the rest of the world. “Due to these defensive qualities and the better economic growth environment, we believe stocks from China, Taiwan and Korea will achieve above-average performance at least in the first half of the year, as long as it is not certain that the pandemic will be overcome in the long term,” says expert Galler. If you want to benefit in particular from the relatively strong demand in China’s growth, you should currently do so through direct investments in the domestic A-share market due to the weaker growth impulse.

However, as soon as an end to the pandemic becomes more likely, a change of favorites to ASEAN stocks and India can be expected. “South Asia is much more severely affected by the pandemic and for this reason also offers more catching up potential. In this global economic recovery scenario, Japanese stocks should also benefit due to the relatively high proportion of cyclical stocks, ”said Tilmann Galler, assessing the situation.

Tilmann Galler, Executive Director, CEFA / CFA, works as a global capital market strategist for the German-speaking countries at JP Morgan Asset Management in Frankfurt. As part of the global “Market Insights” team, he creates and analyzes information about the global financial markets based on extensive research and derives implications for investment strategies. He has 19 years of professional experience in the financial sector and previously worked as a portfolio manager.


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