The global implications of the Iran conflict

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Streams of gold unfold against a black background and form the logo in script, J.P. Morgan.

Brandon Hall, RESEARCH ANALYST, GLOBAL MARKET INSIGHTS STRATEGY, J.P. MORGAN ASSET MANAGEMENT. Hall sits against a grey background.

(SPEECH)

Good morning or good afternoon, depending on where you're calling in from. I'm Brandon Hall, a research analyst here at JP Morgan Asset Management. Welcome to today's webcast titled, The Global Implications of the Iran Conflict. The conflict in the Middle East has continued into its second week, with critical energy infrastructure damaged over the weekend.

Energy prices have surged, with WTI crude oil now trading over $100 per barrel, while risk assets have come under pressure. With the ultimate duration of the conflict still unknown. It is important to consider the impacts a prolonged conflict could have on the global economy and financial markets. To discuss the global implications of the ongoing conflict, I'm joined by Dr. David Kelly, Chief Global Strategist Karen Ward, Chief Market Strategist for EMEA, and Tai Hui, Chief Market Strategist for APAC.

Now, after 30 minutes of prepared remarks from our speakers, we will take questions from the audience. So for those of you who are joining us via webcast, you can send us your questions using the box on the left hand side of your screen at any point during this call. That covers our housekeeping items. David, let me hand it over to you to get us started.

Great.

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Dr. David Kelly, CHIEF GLOBAL STRATEGIST, J.P. MORGAN ASSET MANAGEMENT. Kelly sits next to Hall at a table.

(SPEECH)

Well, thank you, Brandon. And thank you, Karen and Tai, for joining me on this call. And thank you all for calling in to it. So what I want to do is talk a little bit about where we see the situation strategically right now, the military situation. Obviously, these are not so much my insights as the insights of other experts, both from a geopolitical perspective and energy perspective here at JPMorgan.

But I'd like to talk about that a little bit. I want to talk about how we see things perhaps evolving from here, how it all impacts the US economic outlook and the financial market environment for the United States. And then I want to pass it over to Karen to talk about the perspective from Europe. And then also to tie looking at the perspective from the Far East.

This is a conflict that is local in the Middle East, but it has global ramifications. It will affect every economy in the world. And so I think this is a very good time for us to gather these perspectives. So we're going to talk for about 35 minutes between the three of us. And then we want to open it up for any questions.

I do want to start, though, before I get into any of that, by saying, I think we all need to recognize that when these sort of events occur, it's easy to too quickly move to, what does it mean for the economy? What does it mean for investments? What does it mean for human beings?

I mean, there are we're very conscious of the fact that there are thousands of families in America who've got service people serving in the Gulf who are now under some threat. And sadly, we've seen some service people die. We're also very conscious of what this means for the families of people in Iran who've died in this, people in Israel who've died in this, people in Southern Lebanon and people all up and down the Persian Gulf.

This affects a lot of humanity. And so I think we should always think about this in a sober way and recognize that the economic consequences and the investment consequences for many families are by no means the most important thing here. Having said that, where are we?

Well, it is only just over a week into the conflict, and I think it's already at a point where you can see a timeline to the major hostilities here, for the reasons that our colleague Derek Chollet outlined on broadcast last week, which is, we're just going to run out of munitions, both in terms of offensive weapons, but particularly in terms of defensive weapons. And at some stage in any of these conflicts, you've hit all the targets you want to hit.

If you're just trying to degrade your enemy's military assets at some stage, you've kind of hit all the things you can easily hit. And with each subsequent hit, the danger of horrendous collateral damage to civilians grows, and the marginal benefit from a further attack diminishes.

So I think that's one aspect of the timeline, is a military aspect. I think a second aspect, which will be very important here in the United States, is the impact on the economy, because we have seen soaring oil prices, as Brandon was saying. We've also seen soaring gasoline prices. Gasoline is up by about $0.50 as of this morning, up to $3.48 a gallon.

And if these crude prices hold for a little while longer, then we will surely see further increases in gasoline prices. And there is a certain political calculation here that the economy has got enough problems without seeing a surge in gasoline prices in the United States. So there will be certainly political pressure on the administration to try to bring a quick halt to this conflict.

But it won't necessarily be that easy. So you can say you're done with targets, but you've got two issues. One is, do you know what you're going to end up with at the other side, in terms of the Iranian leadership and its capabilities? And then two, are you going to be able to come to any sort of compromise or peace with them, which allows you to resume shipping in and out of the Persian Gulf, as well as the production, distribution of crude oil?

It's not a simple problem. I mean, there are these enormous supertankers which sail out of the Persian Gulf, out into the Indian Ocean and out to the world. 20% of the world's oil comes from that region. An even bigger percentage of natural gas or liquefied natural gas. The problem is these boats are huge and they move very slowly.

The average supertanker carries about two million barrels of oil. Two million barrels. If you think about that, that means $100 a barrel. You're talking about a $200 million cargo on these boats. But they also move incredibly slowly. They move at about 30 knots, which I guess is 15 miles an hour. I just checked that out. I'm not a nautical expert.

So it can take you two days to get from the Northern Gulf out into the Indian Ocean. It takes you six hours maybe to just get through the Strait of Hormuz. If you can't completely dampen down Iranian attacks on these tankers or the possibility of Iranian attacks on these tankers, you've got a problem. And if you have a continuation of the remnants of the Iranian regime now, many of them with a feeling, a sort of a primary need to get the United States back for what the United States has been doing to Iran over the last few days, it could be a very precarious situation.

Now, obviously, we're going to try and find ways of chaperoning these ships down. But then you actually-- well, do you have the Naval assets in the Persian Gulf to chaperone all the ships out, and then all of the food and supply ships back in through the Strait of Hormuz? So it's by no means easy. And the last thing I'd say, and all of this, we have to think. I don't want to speculate, but we have to come up with a baseline of what's likely to happen here.

The regime in Iran has an advantage in that it is fundamentally a clerical regime. So in many religious societies, one of the things that religion does, regardless of religion is it organizes people. And so you've got a huge infrastructure. Yes, they've decapitated the leadership of the regime, but you've got an enormous network, both in terms of revolutionary guard, in terms of the mullahs all over Iran, who may be the natural organizing agents within those localities.

And so it's going to be very difficult for an opposition to rise up and take power. More likely, you will end up with a continuation of the previous regime. And the question is, can you work with them? Will they want to work with you? Will they trust you? And so it could be very complicated. I do think that the most likely scenario is major hostilities will dampen down and some compromise will be found.

Because if Iran can't export any oil, it starves. And if the US can't get any oil out, then you've got high gasoline prices. And that's true for the world. I mean, everybody's got an economic interest in getting the show back on the road here. And I think that will somehow play out.

But it may be, for a long time, much more difficult to get oil out of the Persian Gulf than it was before. And maybe I can cross out the word difficult and say costly, and that could mean a higher level of crude oil prices going forward than we had before this attack. That actually seems to be a little bit what the future's market is pricing in.

I mean, as we were just going on the air here, the price of the April contract for WTI was $100 a barrel. But the price for the July contract was still $84 a barrel, $71 a barrel in December. So the future's market is saying, OK, there's going to be some sort of resolution here, but we're still not banking on getting back to where we were beforehand, in terms of oil prices. And so still some long term economic impact.

So that's where I think we are right now. And thinking about going forward, the major hostilities, I think will die down perhaps in a matter of days. But there will be a lot of residual problems trying to get things restarted in the Gulf, both in terms of distribution and then that has a knock-on effect. You've seen reductions in production. And Iraq has basically had to stop production because all its storage facilities are full. It's going to be a problem for a while.

What does all of this mean for the US economy and for US financial markets? Well, in justice to my colleagues Karen and Tai, who-- we work every week as a global market insights team. So for a US audience, you don't often see Karen and Tai, but obviously, we talk about all these issues. And I want to make sure they can talk, have plenty of time to talk about what's going on in Europe and what's going on in Asia.

So I actually put out something in my notes in the week ahead, which is recorded as a podcast, which is available on Spotify and Apple Play. And also as an article on LinkedIn this morning, really reviewing where we are right now, we think, in terms of economic forecast, given the events of the last few weeks. Not just what's going on in the Gulf, but also looking at some of the economic data that we recently had, and also the EPA decision on tariffs, which I think is quite important.

So where are we? Well, first of all, in economic growth, we've reduced our forecast for US economic growth a little bit this year. Three weeks ago, we were at 2% growth. Fourth quarter to fourth quarter by the fourth quarter of 2026. Now, we're down to about 1.8% It's not as damaging as you'd think. And why isn't that? Well, I think there are a few things.

First of all, growth in the first quarter, I think, is going to be pretty weak. It's going to be about 1% GDP growth is what I'm tracking right now. But we do have a lot of income tax refunds which are about to hit. And they haven't hit so far. And that's partly because the IRS hadn't sent out the correct forms for people actually to claim all the new deductions that were in the OBBBA last summer.

But now, the forms are out there and people will be filing to take advantage of big refunds. So I expect we'll see a big increase in income tax refunds over the next few months or next few weeks. And I think that may well be supplemented by a tariff rebate check, which is I'm sure how the president would describe it, providing further stimulus.

So we think 1% growth, first quarter, maybe 2% to 3% growth in the second and third quarters. And then trailing down to 1% again in the fourth quarter by the time the stimulus is spent. In terms of the impact of oil prices on economic growth, there's a huge difference between where we are today and where we were say, back in 2008, when we saw a big spike in oil prices before the Great financial crisis.

Back in 2008, when oil prices spiked high, the US was a major importer of oil. And so the American consumers' loss was a gain for the countries in the Middle East. Today, the US is a net exporter of oil. The American consumers' loss is the gain of domestic energy producers. Now, there are two different groups of people. Spending on energy goes up as a share of your total income as you get poorer.

So I think this is a big tax on lower and middle income Americans, and a benefit for oil producers or people who have dividends or stock in these companies. So it's pretty unequal. But I do think its overall effect on growth will be somewhat muted. You do have, of course, many consumers who will cut back on spending, because if they have to spend $20 more on filling their tank, that's $20 less to spend on groceries. And that's going to be occurring.

But at the same time, you will see an increase in oil production in the United States at these prices, a lot of new investment makes sense. And you're also going to see an increase in military spending. It's going to take a lot of money to replace the munitions that we've used in the Persian Gulf in the last 10 days.

And that, I think, will also help the economy grow. So overall, I think US growth continues, just a slightly different mix going forward. Looking at jobs, different picture here. The data we have so far is really not about what's going on with oil. But if you saw the employment report last Friday, 92,000 jobs lost. A chunk of that, maybe 30,000 due to a strike among medical workers.

But still, even with that, it's a very weak report. And to me, the thing that jumps out is they finally corrected the numbers in the household survey. So now, the establishment survey has been re-benchmarked. The household survey has got new population controls. Both of them I think are more or less unbiased at this stage. The establishment survey says the total growth in US employment over the last year is just 1/10 of 1% with the US losing payroll jobs in five out of the last nine months.

The household survey says US employment is actually 3/10 of a percent lower today than it was a year ago, with an increase in native born workers of 128,000. But a decline in foreign born workers of over 500,000. Either way, the economy is really not producing as many jobs. Now, I think going forward, you will see a pickup in job growth.

I think you will see a positive number for March and job growth. And maybe you average 50,000 jobs per month over the rest of the year. That should keep the unemployment rate a little lower. But it did bounce up last month. And so maybe it only gets down to 4.2 at the end of the year as opposed to 4.2, which is where we thought it was going to be a few weeks ago.

If you look at profits, we've just wrapped up the earnings season. Corporate profits continue to be excellent. And again, all of these events will have an effect on the mix of profits. But strong productivity growth, which we are seeing. And we saw revisions last week, which showed that that should help corporate profits. So we feel pretty good about profits. Mid-single digits, maybe mid to high single digit profit growth this year, even with these oil effects.

And then inflation. So we've been whittling away at our forecast for inflation this year. We were down to about 3%, 3.0% year over year in June before this attack on Iran. Now with factoring these higher oil prices, I'm running a number of about 3.5% year over year for June. And maybe it'll go a little higher than that.

We'll see. But either way, so long as some sort of resolution is found in the next few weeks or something that allows Persian Gulf oil to flow again, I think inflation will be down to about 2% or maybe a touch over maybe 2.2% by the end of the year, but still basically tracking downwards.

For the Federal Reserve, I don't think this changes the story. I don't think they're going to change rates in March. They're getting conflicting signals on inflation, which says they ought to be hiking, to be honest. And on economic growth, which says they ought to be more cautious. I don't expect them to make any change right now.

We've seen a big sell off in markets. The last thing I'd say before I hand it over to Karen is, I still think it is imperative that people try to diversify and rebalance in a tax smart way. While we do not think that this necessarily causes a recession in the United States, in fact, our baseline is that it doesn't cause a recession, there are a lot of tail risks. When you start a war, you never how things are going to play out and something big could happen.

That's really been the history of the 21st century. And if a big risk explodes at that, the people who are going to be-- the assets that will be hurt the most are the most expensive assets. The people who are going to get hurt most, the investors who are going to get hurt most are those who've got concentrated positions.

So I think it is still imperative, even if you don't see a recession this year, to diversify. So those are the main points I want to make. But now I'd like to turn it over to Karen to talk a little bit about things from a European perspective. Karen?

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Karen Ward, CHIEF MARKET STRATEGIST, E.M.E.A., J.P. MORGAN ASSET MANAGEMENT. Ward sits in front of a sitting area with a couch and chairs, with a bookshelf room divider in a grid pattern that contains books and decorative items.

(SPEECH)

Thanks, David. And I'll start by just echoing your sentiment about how my thoughts really go out to anyone who is personally affected with personnel in the region. In terms of how this is affecting Europe, to describe how it's disrupting the narrative, I want to just reflect on what the narrative has been for Europe this year.

Because actually, there's been a lot of excitement about the European economy and European assets, more excitement than I've seen in quite some years. And that was deserved because we had this trifecta of stimulus that was hitting the economy. So interest rate cuts-- and we're still a very interest rate-sensitive region. They were really starting to benefit. Loan growth was picking up.

Our regulators were taking a slightly more easygoing approach, pushing out some of the climate change ambitions to make life a little bit easier for our region's industrials. But probably most importantly is a big dose of fiscal stimulus was coming from Germany. Germany has been incredibly prudent for the last 15 years working on paying down debt.

And finally, in the last couple of years, decided that it was going to join the fiscal party. All other governments around the world were spending money, and it was going to start doing so. And unleashed a package of spending of 12% of GDP. So we had all this stimulus coming, but we also knew that our consumers in Europe have been incredibly cautious since the pandemic.

So cautious they've been amounting this stockpile of savings, which is 7.5 trillion euros. I mean, this has been the big difference between the performance of the US economy and Europe, is that your consumer spending has been increased by about 20% relative to pre-pandemic. Ours has barely increased at all. So our consumers have been really cautious.

So the optimism for this year was all of that stimulus was going to kick in. Consumers were going to start feeling better about life and we were going to get into that virtuous cycle. So markets got off to a great start. The MSCI Europe in [INAUDIBLE] was up 8% prior to this conflict. And that compares to a flat reading for the S&P.

So how does what's happened recently change the picture? Well, those gains have been taken back off of Europe. And now, the outperformance of the European markets compared to the US is really nothing to speak of. And that is understandable because Europe is a net energy importer. 60% of all our energy use is imported, where of course, the US is now self-sufficient.

So David talked about some big beneficiaries. We don't have those internal beneficiaries. So this is a cost to our consumers and our businesses. But I think what I would say is, if you're remembering or scarred from the last energy crisis when Russia invaded Ukraine and the impact that had on Europe, that's not what we're looking at this time.

In that crisis, Europe had to completely reshuffle and reroute its entire energy supply chain. It was taking 40% of its gas in pipes from Russia. It had to build storage tankers. And largely thanks to the US, was stocking them with liquefied natural gas. So we had to completely reshuffle our entire energy framework.

That's not the case this time around. We are, like the rest of the world, just waiting for those ships to be able to get through the Strait of Hormuz in order to bring down those global energy prices. So it shouldn't be such a meaningful disruption. The other thing to bear in mind is actually because we've been focused on this vulnerability, this frailty that was uncovered when Russia invaded Ukraine, we've really increased our renewables share of energy.

So now we get more than one fifth of our energy from domestic renewables. So we're not as vulnerable as we were. I don't think this is an energy crisis on a par with Russia's invasion of Ukraine. But European consumers and European businesses will be affected. About 40% of our energy comes from oil, and about 25% of our energy comes from natural gas.

So in terms of specifics, if we were to see energy prices stay around their current levels, we will see that filter into what we call our petrol prices, our pump prices to fill up our car. And that probably won't be as great as in the US because we have quite a high level of tax on our pump prices and that smooths the effect.

But then what we will have to a greater extent versus the US is a rise in our natural gas prices. They are up about 63% since before the contract, which is much more than the increase that you're experiencing in the US, which is more like 14%. But again, this is nothing like we experienced last time. These current gas prices are still about a third of what they were at the peak of Russia's invasion of Ukraine. Not even the peak. During that entire period.

So we have experienced much worse. So this really, I think, dampens. I don't think it puts Europe into recession. It really dampens the prospects, however, for some of that strong bounce back in consumer spending I was hoping for. But I don't think it kills the recovery because if anything, I think that we will see this unleash even more fiscal stimulus.

And David talked about one of his learnings over recent years. One of my big learnings of recent years is, the more politically chaotic things become, the more stimulus gets unleashed. And as investors, we have to remember that because we are often focused on the headlines and the political chaos, whereas in fact, what drives growth, what drives corporate earnings and what drives markets is the stimulus.

So I think for Europe, actually, this is going to unleash more energy spending, more defense spending. And if this situation de-escalates, which I completely agree with David, politically seems the most obvious scenario, then I think investors could come quite quickly back to looking at some of the opportunities that exist in European markets as the recovery takes hold.

But also, a key theme that we saw investors looking to Europe was perhaps to diversify away from tech concentration. Only 8% of European benchmark is tech companies. That harmed us for a while. But as tech has generated volatility, that's been a real support for interest in European markets and investors looking for diversification away from tech volatility.

So assuming the situation calms, then I would expect interest to quite quickly return to some of the opportunities in Europe. So that's how I see things. What about over there in Hong Kong, Tai?

Great,

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Tai Hui, CHIEF MARKET STRATEGIST, A.P.A.C., J.P. MORGAN ASSET MANAGEMENT. Hui sits in front of a similar sitting area and bookshelves as Ward.

(SPEECH)

Karen. Thank you very much. It's quite interesting you mentioned about how Europe learned from the Russia-Ukraine crisis and the energy impact. I think for Asia, obviously, we suffered less during that period, albeit we all suffered a global inflation. But at the same time, in this particular conflict, we are very much at the epicenter, in terms of the potential blockade of the Strait of Hormuz.

Ultimately, economies such as Taiwan, South Korea, Japan, over 60% of their oil imports have to go through that part of the world. And therefore, disruptions could well be quite challenging if this confrontation is going to be extended. So I'm just going to quickly touch on three aspects. One is the impact on the Asian economies. It does vary from country to country or market by market.

Second, the policy response, and finally, some observations in terms of the markets. I think in terms of the economic impact, there are two things. One is obviously the potential constraints or supply side shocks if we do have an extended disruptions in the energy supply. The good news is for some of the Northeast Asian economies, such as Korea, Taiwan, Japan, they do have ample oil reserves, typically lasting three, if not six months.

So again, that will help to limit the disruptions. But for Southeast Asian economies such as Indonesia, such as Malaysia, they do have their own oil production. So again, it helps to diversify. In the case of China, oil does not really play a role in electricity production. And gas's role is only about 3% of overall production.

As many of you would know, the effort to boost renewable energy means that over half of China's electricity production today is actually done by hydroelectric power, solar, as well as wind. So I think the long term strategy to reduce reliance on fossil fuels, it is slowly working from the perspective of China.

And you may actually see a renewed demand for electric vehicles if we do see a pickup in gasoline or petrol prices across the Asia region. Now, in terms of inflation, again, it does vary from one market to another. Some of the more developed, high income economies, such as Korea, Japan, their food and energy part of the CPI is typically 30% to 1/3.

You often see energy prices move in tandem with food prices. So that's why I put the two together. And for the developing part of Asia, Southeast Asian economies such as the Philippines, Indonesia, the CPI basket of food and energy is typically 45 to 55%. And therefore, they are potentially more exposed to the short term spike in both energy as well as food prices, which means for some of these central banks, they may have to act a bit more promptly, in terms of tightening policy rates in order to stabilize the currencies and be really just to protect or, really, just to maintain real interest rates to protect savers and their deposits.

And furthermore, in terms of other policies, what we've seen so far, a lot of export restrictions on diesel and refined products, really just to make sure that domestic supply is secured. For Taiwan and South Korea, the government's very much looking into providing a price cap in the short term, really just to calm the general public so that they don't rush off to fill up their car with petrol.

Long queues at petrol station. For other economies such as Indonesia and Malaysia, they do have some form of price control. Quite often, their diesel and gasoline prices, petroleum prices are set by the government. Of course, what that means is, if the cost of oil does rise, it is going to come out of the fiscal buffer.

So as David rightly mentioned, Karen mentioned too, fiscal policy will play a role. And in the case of Asia, we're going to see almost immediate fiscal impact on offsetting some of the rising costs for the general consumers is obviously clearly important, in terms of political stability in many parts of Asia as well.

Finally, on the markets, obviously, as many of you will notice, Asian markets have gone through a very significant bout of volatilities, both last week and this morning. For example, the markets such as South Korea and Taiwan. Now, I think one thing to notice is that, for example, South Korea has gone through a very significant, uninterrupted rally for most of 2025 and the first part of 2026.

So you can rightfully argue that many investors positioning in these markets are already quite lofty. And this is quite a healthy correction. And in selected markets such as Korea, I think the speculative element, the retail elements of the market is also quite significant. And therefore, you may see investors really reducing or eliminating the position on the back of margin call.

There are a number of passive ETFs with two or three times leverage. That obviously also exacerbates the market volatility as well. And the final point is if you look across Asia, especially Northeast Asia, like Japan, South Korea, and Taiwan, I think in the past few sessions, you see quite a broad based sell off, quite indiscriminate, regardless of sectors or companies.

And I think from that perspective, again, the retail participation and also the common passive ETF strategies does play a role. I think in the longer term, I will hold a very similar view as Karen being more optimistic. Ultimately, you do have still very much the AI developments, both in the US and across the world, fueling demand of exports coming out from Taiwan, semiconductors, as well as South Korea.

In terms of semiconductors and memory chips, Japan clearly is very important in the various components that go into data centers as well. So once this particular crisis, it subsides, I suspect there could well be a lot of buying opportunities when it comes to tech-related spending that feeds right into these Northeast Asian markets.

Very final point. If you look at the Chinese market both onshore and offshore, the reaction is a bit more muted, a bit more calm compared with the rest of Northeast Asia. I suspect that's largely because, as I mentioned earlier, we've seen a lot of accumulated gains in Korea, Taiwan, and Japan, and to some extent, markets just taking profit on the back of all the uncertainties that we see in the Middle East right now.

So for Asian markets, clearly the duration of this conflict is critical. But at the same time, I think many Asian economies have been preparing for such contingent contingencies. The long term prospects for both Northeast Asia, China, and Southeast Asia remains largely positive in our view. So back to David.

Perfect. Thank you very much, Tai. Thank you, Karen. Thank you, David, for your comments. Thank you all for sending in questions. A reminder to please continue to send in your questions as we go throughout the question and answer. David, I'm going to bring the first question to you. People are asking about our inflation outlook. So I know you said it spiked through the middle of the year. Get back to around roughly 2.2% by the end of the year. The question we're getting is, how important is oil, really, to that disinflation story, and are there any other components that you're watching that lead you to expect continued disinflation?

So I think oil has some impact. I think energy in the CPI has got about a 6% weight in the US CPI-- sorry, maybe 7%. So it's not the biggest part, but it is the most volatile part. So that's part of the story. But I think there are two other really important components. One of them is that if you look at shelter costs, so particularly both rent and owners' equivalent rent. And rent is about 9% of CPI and owner's equivalent rent is about 24% of CPI.

So you put the two together, you've got a third of CPI. Those are calculated with a very long lag of negotiated rents. And what's going on is, remember I talked about the actual decline in the working age population. Well that's actually affecting vacancy rates in the rental space and that's holding rents down. And that is feeding through to a very steady decline.

You can see that in the inflation page in the guide. I can't remember what page number that is in the guide. But you can see that steady decline in shelter costs. And that's going to continue. It's very easy to see that continuing. So that's one big part of it. A second big part of it is our assumption on tariffs. And I didn't get to this earlier in detail.

But if you look at tariff revenue as a share of US goods imports, it was running at about 11% prior to the Supreme Court deciding that the IEEPA tariffs were illegal. Now, what's going to happen is the government is going to have to refund all the money basically collected to this point. A lot of lawyers are going to make their year trying to get the money out of the government, but the government will actually have to refund about $170 billion.

But going forward, what's happened is the president has signed into place a 10% general tariff. He has said he was going to sign into place a 15% tariff as of this weekend that still hadn't been signed. But Scott Bessent, the Treasury Secretary, says it's imminent. So I suppose it will happen. But even at 15%, we estimate that the effective tariff rate-- there's one which is the statutory rate, which you look at relative to if imports didn't change.

But the effect of rates in terms of revenue as a share of goods imports, that could come down to about 9.1%. And I know Scott Bessent said by the time they've gone through the other authorizations or the other authorities by which he might be able to raise tariffs using other sections from other trade bills, he expects to restore the pre-IEEPA ruling tariff level.

I'm not quite buying that. I think that he's going to run into a buzzsaw of criticism and the administration will. So my guess is 15% rate, or the 15% rate that the president announced, that flat rate, it translates into an effective rate of about 9%. I think that's where we're going. That's a long way of saying we're going for an 11% rate down to a 9% rate. Even if we're staying at 11, the inflation effect is just when that lifts off from 2 and 1/2 up to 11.

So by the time you get to the middle of this year, that inflation impact is gone. You're just looking at a level of prices. But if the tariff rate comes down, you could actually see some negative effect from tariffs. So you put those two things in and that's what gets that inflation rate coming back down again. So I feel pretty confident that's what's going to happen here. And it's not just about oil stabilizing. It's really about shelter costs, shelter inflation coming down, and then the tariff impact going from a big positive to a negative, in terms of US inflation.

Great. Thank you, David. Karen, I want to bring the next question to you. You mentioned in your comments that Europe is not at risk of an energy price shock as it was in 2022. But there may be some different vulnerabilities across different countries. So the question we're getting is, which countries do you think within Europe are either more exposed or less exposed to higher energy prices?

Yeah. Great question. Thank you for that. So on the less exposed, a few countries that have actually done a really good job of making themselves energy independent, and that is Spain, who's increasingly using renewables. The sun shining in Spain very much helps. But also in France, still has a very large nuclear program, which has served it very well.

On the most effective side there, Italy is a big natural gas user, and also the UK. And I think the problem for the UK is that not only are we big gas users, but we also don't have an awful lot of fiscal space for our government to think about taking some of the burden off of consumers.

They've talked a little bit about whether they could possibly cap prices, but I think that isn't particularly likely. So a bit of a dispersion in activity with some of the Southern regions probably going to fare better than the Northern regions. And then of course, there are some big exporters as well in the North, whether that's Norway. We do also have some big energy exporters.

Thank you very much, Karen. Tai, I'm going to bring the question back to you. People are wondering if you could just dive a little bit deeper into the implications of this conflict and more broadly, your outlook for China. And then from your perspective, do you think this conflict at all impacts US-China relations moving forward?

Well, that's a great question because we do have President Trump scheduled to meet with President Xi in Beijing, either at the end of March or early April. And so far, it looks like this summit is likely to go ahead, despite all the challenges in geopolitics we've seen so far. I think China's side clearly does want to at least maintain some sort of stability.

It seems like Washington is likewise looking for a similar connection with Beijing at this point, so I don't think this is going to derail the summit and throw sands into the works. But clearly, there's still a lot of work to be done, in terms of technology, in terms of trade, imbalances between both sides. I think for the Chinese economy, as I mentioned earlier, it is slowly reducing its dependence on fossil fuels, and therefore coal continues to play a major role when it comes to power generation, whereas gas and oil play less.

If you look at China's consumption of energy to break down, oil really goes into transportation, both aviation as well as automobiles and maybe some shipping. But otherwise, the economy's reliance on oil is maybe more on the chemical side more than the energy side. Of course, China does have a number of economic challenges. The housing market continues to be under pressure.

The job growth in China is not great. So I think there's a lot of room for fiscal support for the economy. But we just started the National People's Congress last week. It looks like the government is quite happy where things are right now, so we're not expecting significant stimulus program coming through unless the global economy turns for the much worse.

And I don't think we're going to see really creative policy to revive the housing market either. So I think what we're going to see in China is very much the gradual growth for 4.5% in the economy this year. The current conflict in the Middle East does create some bottlenecks, in terms of energy supply, but I don't think it's going to derail growth per se. But the domestic fiscal policy, to me, is going to be the key wild card when it comes to the Chinese economy in 2026.

Thank you, Tai. Karen, it seems that that question got people's minds into geopolitics and now we're getting a lot of questions wondering, if at all, does this conflict change Europe's approach to the war in Ukraine? And then more broadly, what could this mean for European governments defense spending commitments?

Yes. I mean, I think that is the fear in Europe, that the distraction, in terms of attention, but also military equipment, perhaps therefore lessens the support for Ukraine in its ongoing fight against the aggression from Russia. So I think there is a concern there, and perhaps the chances of a resolution in that part of the world are looking slimmer.

And so that does take away from one of the potential important catalysts that would have been very helpful for Europe. But again, Brandon, as I say, I'm constantly reminded when I'm thinking about politics, political actions spark stimulus reactions. And I do think that President Trump was right when he said that Europe wasn't pulling its weight in its military performance or meeting its NATO commitments.

You've seen some pretty significant ramps up since Russia invaded Ukraine, in terms of defense spending. And I think we're just at the beginning of that story. There's a bit of concern at the moment about how each national government will pay for it. There are certain countries in Europe which have relatively high debt levels.

But I suspect what we'll hear over the next few months is that Europe are going to band together and pay for that defense spending from some kind of common debt pool. And that will allow them to significantly increase the numbers. So European defense stocks have been doing very well. We highlighted in our outlook we expected that to continue. And I think this only adds to the likelihood of even more stimulus and defense in Europe.

Thank you, Karen. David, I want to come to you with something that Karen touched on. And that's debt. Conflict is expensive. So the question we're getting is what does this conflict mean for the outlook for federal debt in the United States and just the overall level of deficits more broadly?

Yeah, that's a great question. So the Congressional Budget Office put out their estimate a few weeks ago of what the Federal debt would do under current policy orders or under current law. And so they have the debt growing from about 100% of GDP right now to about 120% of GDP by the middle of the next decade.

That was the track we were on. That is a track, to some extent, that the bond market is aware of because everybody's aware of it. And so it seems like the global bond market had more or less taken that as a base case. Now, two things have happened since then. First of all, the IEEPA tariffs were ruled to be unconstitutional.

So immediately, you have to add $170 billion to that debt. Now, this year, we're going to run a deficit of about $2 trillion. So even at that, it's not a huge-- I mean, it sounds like a huge number. It is a huge number. It's just not huge in the context of US debt. But it adds something to it.

And I think that also, if the IEEPA tariffs are replaced with something which raises less revenue, that will further add to debt. Now, the Congressional Budget Office did actually make some estimates, which we have not incorporated right now, assuming that the IEEPA tariffs went away and they're not replaced with anything, because that's probably not going to happen either. So we're sort of in pause here while we think about how we're going to reflect the most likely scenario for US debt.

And then the spending. I mean, it is millions of dollars a day in spending just on, in fact, I think it may be hundreds of millions of dollars a week, in terms of spending on the munitions here and just maintaining this posture. I don't have good numbers on it. There are various studies on how much the US spends, something like $8 trillion on defense between The Gulf or the second Gulf War and today. So that is a lot of money.

And I think it will obviously add to the debt. And then there's also the possibility of further stimulus checks. So I think you raise the debt trajectory. And maybe that's one of the reasons why we're actually seeing a lift off in US interest rates. It's a very odd situation where you think flight to quality. So the dollar gets bid up. And shouldn't Treasury interest rates fall?

But in this case, I think people are concentrating on just that fact. That this is further going to push US debt higher. And I think that's right. So right now, it's still less than 4 and 1/4 on a 10-year Treasury. I don't think those rates are particularly high. And also, I wouldn't really be making a duration bet here. If I'm right and if nothing else goes wrong and we avoid a recession, then I think 4 and 1/4 is a bargain for the government, in terms of borrowing money at this rate.

And I think if anything, those long term rates might even edge up. So it's something we're looking at. But the one piece of news, I guess, for markets is there are a lot of people focusing on this. So I think markets should be relatively efficient in pricing it in.

Very helpful. Thank you, David. Tai, David mentioned safe haven asset. We're getting a lot of questions here on the yen and recent moves in the yen. So obviously, Japan very, very exposed to the conflict. Can you talk a little bit about your views on the yen's recent performance and what your outlook is for the yen moving forward?

Yeah, absolutely. I think that's a couple of things that hasn't really worked very well. Safe haven assets, gold yen. You can argue that the Treasury, as David mentioned. I think for the yen, the difference this time around is a couple of things. One is Japan is in a more normal inflation environment, and therefore the Bank of Japan is currently now contemplating whether they should raise rates later this year, especially on the back of the risk of high energy prices.

So I think in that sense, the yen trade is no longer as simple as before, where you've got the BOJ committed to 0 interest rate policy with QE a few years ago. But right now, I think the inflation dynamics in Japan, as well as the BOJ's direction-- and of course, with the new prime minister coming into place, potentially unleashing more fiscal stimulus. All of these does raise the question of the sustainability of Japanese government debt, alongside with the risk of currency depreciation.

So I think what investors don't want is to introduce unintended risks when they try to hedge a particular risk, such as geopolitics. So I think from that perspective, yen, at this point, may not be the most appealing hedge currency or way to hedge your or safe haven currency to hedge your geopolitical risks. And as you rightly mentioned, the fact that Japan is a significant energy importer, it will be quite exposed to high energy prices. I think that, again, push investors away from yen to other more traditional safe haven assets such as the dollar. Maybe some other more defensive sector stocks.

Thank you, Tai. Karen, bringing the next question to you. Sticking on monetary policy. We're getting a lot of questions. Wondering if you could share your latest outlook for the ECB and the BOE and whether or not or how this conflict really goes into the calculus for the outlook moving forward.

Yeah. And I think this is an opportunity for investors actually, Brandon. Because the way the market pricing has gone on the central banks in Europe is very puzzling. And I would disagree with. So we've discussed already on this call that in all parts of the world, inflation is probably going to push up.

But the growth hit will probably be less in the US and more in Europe. However, the market pricing is still for the Fed to be cutting interest rates this year to cut still largely priced, whereas suddenly the market switched to the idea that the ECB will be hiking interest rates. And maybe the Bank of England will be on hold, and itself even perhaps hiking rates more likely this year.

I just don't see that happening. I think that the central banks, yes, inflation is going to be pushing up. That means it's more likely they'll sit tight and stay on hold. But I think for them to actually move towards hiking interest rates seems very unlikely. So I think that opens up an opportunity for duration in some of the European bond markets.

Thank you, Karen. David, I'm going to bring the next question to you. Two more questions to you, and then I'll feed the last couple questions into everybody here. We're talking about rising energy costs, rising oil prices as it relates to AI adoption and development. Energy costs have been a bottleneck, really. So the question we're getting is, do you think at all the recent rise we're seeing in energy prices will disrupt AI adoption or development moving forward, at least as it relates here in the US? And then if anyone abroad has any comments, please feel free to share.

Yeah, I don't really think so. I mean, I think there are multiple bottlenecks here. And obviously, the data centers need electricity. And that means the easiest way to get that is natural gas. And so I think you'll have a lot of demand there. But that's not really impacted by the LNG story. We're certainly not going to be producing using a whole pile of oil-powered power plants to do this.

So I think there always was an electricity bottleneck to some extent here because of this. And I think you'll see further investment in that sector. It adds a little bit to inflation. I think it will put more pressure, political pressure. The administration has promised that these data centers won't push up local electricity prices, although it seems like they must.

But I think it's not the kind of energy that's really being used for electricity production here. So it's really an electricity production issue. And I think that all that investment into electricity production and storage facilities, I think is going to continue.

Thank you, David. Any comments from abroad?

I think just generally, that to me, the big question for this year remains when you're thinking about global allocation, the extent to which these tech companies can demonstrate return on investment for their massive amounts of CapEx they've been doing. And that return on investment depends on demand for AI capabilities, but it does also depend on the cost of producing the AI capabilities.

And David said about how we shouldn't necessarily see one for one with electricity. But I think when we look around the world, we can see spiraling resource pricing, whether that's memory prices, which have doubled. So I am slightly concerned. Obviously, we're all focusing on just the day-to-day noise of this conflict.

But as the dust settled, to me, it does feed into that broader concern about return on investment for this CapEx and whether these big mega cap tech companies justify the valuations. But I know it's been a big theme in your part of the world as well, Tai. What do you make of it?

No. Actually, I take a more constructive view from Asia's perspective because regardless of who comes out on top in the AI model race, they all need data centers. And data centers needs a lot of compute power. And this comes from, the likes of TSMC, Samsung, and [INAUDIBLE]. So I think from that angle, the fact that these companies in Taiwan and South Korea, they basically have a monopoly, if not duopoly in semiconductors and memory chips.

That to me, continues to be very attractive. And that's partly why you've seen these markets outperform the US and global markets in 2025 and 2026, even up to this point, despite all the volatilities that we've mentioned earlier. I think in China's case, the AI development is going to be different.

The subscription model does not work really that well in China, which means models will have to be integrated into consumer services such as e-commerce, such as financials, such as healthcare. So again, I think there will be breakthroughs in models. But how to monetize it, as Karen rightly said, it's going to be a key question. But in China's case, they may have to actually integrate with existing platforms to make the most of those innovation.

Thank you. Thank you, all three of you. We have about five minutes left. I think that leaves us time for one more question for each of you. We'll make it play off of each other. David, I'm going to start the question with you. We talked about the impacts on Europe and Asia of this conflict. They're obviously closer from a geographical perspective. Does that at all make you a little bit concerned about allocating to international equities, or do you see this as an opportunity to rebalance?

No. I think it's an opportunity to rebalance. I mean, this is why I think it was so important to do this call, because I think each region has its strengths and its vulnerabilities. But I think you went into this year, we still are in a situation where the US is just much more expensive as an equity market than the rest of the world, and the US dollar is generally overpriced.

When I look at the European situation, I mean, the good news is they all drive around in little cars which don't use any gas at all, even to the extent that they're not driving electric vehicles. And so the actual fossil fuel consumption of Europe. Europe has taken the global climate change very seriously, but it does mean that they are less exposed over time to increases in oil prices because of that.

And that technology of clean energy, whether it is in transportation or in electricity generation, I think is going to be very powerful. And then with Asia, I think you've also got-- China is producing tremendous amounts of clean technology and clean energy technology. But also, to some extent, they can sit on the sidelines.

And while yes, Iran was a partner of theirs, and so maybe in somebody's version of geopolitical risk, if you treat this whole thing as a game, which it is not, but if you did it that way, you might say, well, they're losing a partner. But they're not using a whole pile of military resources to do this. They're not focused on trying to drill more oil out of the ground.

They are focused very much on technology and clean energy, and it seems to me that is the path forward in the long run. So they may be, in fact, long term beneficiaries from this. Either way, the issue is, we don't when the next attack is going to occur. We don't what the next tail risk is. But US investors are very over-concentrated in large cap US equities, and they need to diversify internationally.

I think there's a long term return argument, a strong one for that because of the dollar, because of valuations, because of these long term growth trends overseas. But there is also a risk exposure here. A lot of the US investors have got all their eggs in the US basket. And we live at a time when baskets are getting shaken up and dropped to the ground all the time. And I think this is a time when people really need to think seriously about diversifying in a tax efficient way.

Thank you. Thank you very much, David. Karen and Tai, going off of those comments, we're getting a lot of questions wondering within your market. So, Karen, we'll start with you. What parts of the market, whether it be from a geographical perspective or a sector perspective, do you find most attractive for 2026 and beyond?

Well, we've already talked about defense. So the defense companies have had a very significant run. But I still think that our underestimating the change that's going to happen. I also think European financials, European financials have actually outperformed the Mag Seven in recent years, which I think is a very unknown fact, particularly within the US. But that's because the earnings outlook is improving dramatically for European financials. And they pay it back to you.

I mean, the dividend yield on these companies is significant. So I think that they are two specific sectors. But honestly, my case for Europe is that we are in a policy regime change that Europe has just been woken up. Europe often needs a crisis, honestly, to do good policy. When things are quiet, we tend to drift along and overregulate. And I think Russia's invasion of Ukraine, the pandemic, what's going on now, it all spurs us into action.

So I actually think that ultimately, when we look back, we'll have seen that this was good for Europe. It's woken us up into a better policy space. So it should be pretty broad based.

Thank you very much, Karen. And Tai, to wrap it up, I'll pose the same question to you. What parts of the market are you most excited about?

Well, I've spoken a lot about technology in Asia already, both in terms of hardware, but also AI developments in China. Another thing I do want to highlight is the corporate governance reform that we're seeing in many parts of Asia. So I'm sure many of us are familiar with the Japan improvements over the past decade and a half.

And that's really yielding results, in terms of how companies are making use of their cash, how they improve the return on equities and capital invested. We start to see similar progress, or similar program in Korea, in South Korea last year. And companies are adopting these changes very quickly. So the fact that many Asian companies are giving a higher priority to shareholders in generating shareholder value to us are very exciting. And this is going to be a long term structural improvement that feeds into what David mentioned about international diversification.

Perfect. Thank you, Tai. Plenty of opportunities abroad. We have 20 seconds left on the timer. So I think that does it for questions. David, Tai, Karen, I want to thank all three of you for joining me today. I found the conversation to be very useful, and I'm sure our clients did as well.

And I want to thank all of you, especially those who sent in questions today during our webcast. If we did not get to your question, please do reach out to your JP Morgan representative and someone from our team will be happy to get back to you as soon as possible. Again, depending on where you're tuning in from, have a great rest of the morning. Have a great rest of the day. And see you again soon.

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