New trends will determine market developments in the second half of 2021, according to J.P. Morgan Asset Management specialists, and managing inflationary risks advantageously will be key among them.
Is the market at a major turning point? Economies are growing strongly in countries where effective COVID-19 vaccination programs are underway, raising fears of growing inflationary risks. But experts still appear to be divided as to whether the current increase in inflation rates is temporary and they remain unsure what the long-term financial market impact will be.
Should they have a significant impact, central banks will have to raise interest rates to prevent economies from overheating. The U.S. Federal Reserve, for example, recently confirmed it did expect to raise interest rates when the domestic American economy fully recovers from the effects of the pandemic.
Clear Indication
Karen Ward says this is a clear indication that the current increase in the pace of inflation is not a temporary phenomenon, but that it will have a lasting impact. At the «Mid-Year Investment Outlook 2021» conference last week, she maintained that further volatility in the financial markets was to be expected.
As the Head of Market Strategy for Europe, the Middle East and Africa (EMEA) at J.P. Morgan Asset Management, Ward believes that inflation can be positive. «Inflation from my point of view also means that economic developments are both strong and healthy, and we see particularly good corporate earnings ahead,» Ward said. That should lend positive momentum to the financial markets and accelerate a rotation out of growth into value stocks.
Hope for Value Stocks
Michael Barakos has a similar view. In his opinion, value investors have been very discouraged since the 2008/2009 financial crisis as value shares have fared 56 percent worse than growth shares over the past 13 years, the JPMAM Senior Equity Portfolio Manager von JPMAM explains.
There are several indications that we are at the start of a new era in value shares, particularly in Europe, Barakos added.
Tip of the Iceberg
«If you at all the developments in relation to value shares over the past 13 to 14 years, then the increase seen in the past eight months is just the tip of the iceberg», Barakos said, and it is comparable to the time between 2000 and 2007 when value shares rose by about 90 percent.
Anton Pil also sees hidden potential in the markets, mainly in alternative investments. They will increasingly be used by investors to remain invested in equities, even when central banks start tightening liquidity.
Return to the Office
«Alternative investments are in demand because they have a low correlation with the markets while also providing stable returns. A few years ago, many investors bought alternative financial products to increase returns, the Global Managing Partner von JPMAM Alternatives said. That has changed.
He said it was fascinating to see how at the outset of the pandemic, there was talk that people would never return to the office or go shopping again.
«That would have meant that we would be living in cages, never leaving our homes. But just as soon as people started getting vaccinated, the reality was the exact opposite», Pil said. «We also saw this in the visiting frequencies in our retail branches while observing how everyone returned to their offices,» Pil continued.
As a result, the JPMAM expert is reckoning with high potential in the American real estate market.
«It is one of the few asset classes in the U.S. that has not kept up with global price increases – even without COVID-19», Pil says, «it is probably one of those value areas that nobody in the U.S. was looking at.»
Real Estate Not Overvalued
He has been seeing a turnaround for the past three months. In that time, U.S. real estate funds have seen significant inflows of assets and the spread between U.S. real estate and government bonds has increased.
«And there are no indications that U.S. real estate is overvalued at the moment,» he concludes. The same thing goes for infrastructure investments, which generate stable returns, even in times of inflation, he observed.
All the JPMAM experts are clearly of the view that inflation is here to stay. The rate will continue to increase but it won’t get out of control as it did in the 1970s, Karen Ward maintains. Inflation will provide new opportunities and lend the market momentum.
ESG by No Means Priced in
The dominating theme will be a rediscovery of value shares, mainly in Europe, as well as American real estate and infrastructure. And, finally, ESG-criteria based sustainability investments, which will manifest themselves in all regions and sectors.
ESG is by no means priced in yet, Karen Ward maintains, and the upcoming United Nations climate conference in November (Cop26) will give the theme further importance, «given that U.S. President Joe Biden will be sitting at the table», the JPMAM specialist says.
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