Ukraine, China’s covid policy and inflation: the trident that keeps investors awake | Business
“Our base case in Europe is not a recession, but the economy will get worse before it gets better.” The warning is from Karen Ward, chief strategist at JP Morgan Asset Management for the EMEA zone (Europe, the Middle East and Africa) and she made it last week at the annual event that the manager organizes with journalists to which EL PAÍS was invited.
The US manager identifies three risk factors that currently condition investment decisions: the war in Ukraine, the impact on the Chinese (and world) economy of the zero covid policy of the Beijing Government and the response of central banks to the rising inflation of recent months. “The price of energy continues to be our main concern for the coming months,” Ward acknowledged. And it is that Moscow is the main exporter of many key raw materials for economic growth such as palladium, natural gas, oil, platinum or fertilizers for agriculture. The expert of the American manager, however, prefers to see the bottle half full: “If Europe has shown something in recent years, it is that, from an institutional point of view, it is being stronger than ever with the creation of different firewalls. To investors I recommend caution in the short term, but they must be prepared to take advantage of the sustainable growth that will be generated in the long term”.
“unsustainable” policy
In the case of China, the Asian giant faces several challenges: increased regulation in different key sectors such as real estate or technology, tightening of fiscal and monetary conditions, and a very aggressive policy to keep the coronavirus at bay. “This has caused the Chinese economy to lose traction,” said Paola Toschi, a strategist at JP Morgan AM. In her opinion, the zero covid policy may make sense from a health point of view, since Beijing is aware of the weaknesses of its health system, but from an economic point of view it is “unsustainable”. “They are beginning to be more flexible in their vaccination campaigns. To this must be added that credit conditions in China have improved. Another factor for hope is that, in my opinion, all the bad news is already captured in the price of Chinese shares, which supports their stocks”, said Toschi.
Another key piece that will determine the evolution of the economy and the markets are the central banks. They have the Herculean mission of stemming the rush of inflation without causing a recession. For many, the square of the circle, but Tillman Galler recalled during the event held in London that “it would not be the first time that investors underestimate the capacity of central banks.” In his view, the Federal Reserve within central banks is likely to be much more aggressive in tightening monetary conditions until the end of the summer, only to lift its foot in the last quarter of the year.
Karen Ward believes that both the equity and fixed income markets have discounted much of this negative scenario in their asset prices. “We are witnessing the birth of a new economic regime,” Ward said. “And that has clear implications for inflation, interest rates and public debt. Also, in equities there will be a rotation of portfolios towards those companies with a more defensive profile”, she added.
