Three key factors still drive Asia’s macroeconomic outlook: trade tensions, the policy response in China, and global central bank easing. Together, they will continue to dictate growth, trade tensions and China’s limited, domestic focused policy response will do little to lift regional growth.
One positive catalyst: central banks, most notably the Fed, are now set to ease. A move towards monetary stimulus completes a remarkable shift from earlier this year, when more tightening was expected. The spillover of expected Fed easing, combined with benign regional inflation, might allow monetary easing across most of Asia. That, in turn, might partially (not fully) offset the negative aspects of trade uncertainty and slowing global growth.
Any one of these shifts would complicate the outlook for markets. The combination is particularly difficult for investors to navigate. Take, for example, the U.S. and China trade war. History has few, if any, precedents for such a battle between the world’s two largest economies—especially when economies and supply chains are deeply interconnected.
These unusual circumstances create three challenges:
Any one of these would be difficult for markets to “price.” The combination, in addition to rapidly evolving monetary policy, make for a very challenging outlook for Asia.
The most pronounced of the three trends is the ongoing U.S.-China trade and technology conflict. The direct impact of tariffs and policy uncertainty are beginning to have a clear negative impact on regional growth, although the redirection of trade is creating some relative beneficiaries.
At the epicenter of both the trade and tech conflict, Asia is feeling the impact through three channels–weaker exports, reduced business and consumer sentiment, and declining fixed asset investment.
Increased domestic consumption and a burgeoning middle class across Asia have made the region less dependent on trade. However, exports are still the main driver of Asia’s business cycle. For example, Exhibit 1 highlights the clear correlation between dollar export growth in Asia, MSCI Asia (ex-Japan) earnings, and index performance.
When trade growth weakens, it is unusual for Asia, the world’s most trade dependent region–to do well. Headwinds to exports have been wide-ranging. In addition to supply chain redirection, capital expenditure across developed markets, which tends to drive imports, has also slowed sharply.
Still, there is a glimmer of hope in the outlook for trade. Although escalation risks have clearly risen, we think there is a narrow base case that there will, eventually, be a deal that would mutually reduce tariffs (See our latest commentary on trade tensions).
A reduction in supply chain uncertainty and a removal of tariffs would unambiguously boost global trade above current levels.
Second, most of the downturn has been about export prices, and in particular semiconductors, which are nearly as important for East Asia as oil is for the Middle East (see Exhibit 2).
However, trade indicators give some signs of a rebound. Trade volumes showed early signs of improvement in Q2. With oil prices rebounding and semiconductor prices bottoming out, export values and thus regional equities could gradually recover.
In the beginning of the year, we highlighted in our 2019 Outlook how Beijing policy would be one of the most important factors affecting the outlook for Asia. In particular, we looked at the tools policymakers would useto stimulate the slowing economy.
China has launched a large stimulus program every three years since the crisis, as its economy cyclically slowed around the credit and housing cycle (see Exhibit 3). These stimulus efforts often had large spillover effects, lifting regional (and global) growth. As the trade war rages on and attempts to deleverage take their toll on the economy, China’s reaction will be key for the region.
So far, in line with our expectations, the policy response has been much smaller and the composition is different from past stimulus rounds. It is smaller because of the already high debt levels and housing prices bordering on bubbles in many markets. The total room for monetary easing is simply smaller than in the past.
For this reason, most of the stimulus has been through fiscal policy, and notably via tax cuts. Because tax cuts are a relatively new form of stimulus for an economy that is used to government spending on infrastructure, it was unknown how much would be saved versus spent.
It turns out most has been saved due to high levels of uncertainty. The impact of this shift in policy is twofold: first, Chinese growth is continuing to slow, which marks a change from previous rounds of stimulus (when growth notably accelerated). Second, the global impact is much smaller; stimulus focused on domestic consumption and tax cuts is helping to stabilize growth at home, but doing little to boost the global cycle.
With global growth slowing amidst trade uncertainty and weaker Chinese growth, regional central banks are turning dovish to cushion the downturn.
Weakening global growth and soft inflation has increased the room for central banks to cut rates. Following the dramatic shift by the Fed moving from expectations of hikes at the end of last year to expectations of multiple cuts by the end of 2020.
This shift by the Fed can mitigate currency depreciation and outflow pressures on regional Asian economies and removes a hurdle for central banks to ease.
As we now expect the Fed to cut this year, it opens the door for rate cuts from the Bank of Korea, Bank of Indonesia and the Central Bank of China (Taiwan) potentially among others. In addition, with growth risks tilted to the downside, the People’s Bank of China (PBOC) is positioned to ease more aggressively, while still keeping an eye on financial stability risks. As trade uncertainty lingers past the G20 détente and global growth continues to show late cycle dynamics, Asian central banks have some room to stimulate growth.
These three forces will likely shape the economic and market outlook over the rest of 2019; trade uncertainty, despite the recent détente, will continue to negatively impact sentiment and business investment, Chinese growth will continue to slow and the changing composition will amplify the slowdown for the global economy.
Partially offsetting these negative trends will be regional central banks looking to cut rates. Amidst the themes, country and asset class selection will be key. Countries that benefit from supply chain redirection (such as Vietnam) or that can offer resilient earnings growth (such as India, Indonesia, or Thailand) can offer some opportunity amidst the uncertainty.
Learn more about becoming a J.P. Morgan Private Bank client.
Please tell us about yourself, and our team will contact you.
Purpose of This Material
This material is for information purposes only, and may inform you of certain products and services offered by J.P. Morgan’s wealth management businesses, part of JPMorgan Chase & Co. (“JPM”). Please read all Important Information.
GENERAL RISKS & CONSIDERATIONS.
Any views, strategies or products discussed in this material may not be appropriate for all individuals and are subject to risks. Investors may get back less than they invested, and past performance is not a reliable indicator of future results. Asset allocation does not guarantee a profit or protect against loss. Nothing in this material should be relied upon in isolation for the purpose of making an investment decision. You are urged to consider carefully whether the services, products, asset classes (e.g. equities, fixed income, alternative investments, commodities, etc.) or strategies discussed are suitable to your needs. You must also consider the objectives, risks, charges, and expenses associated with an investment service, product or strategy prior to making an investment decision. For this and more complete information, including discussion of your goals/situation, contact your J.P. Morgan representative.
Certain information contained in this material is believed to be reliable; however, JPM does not represent or warrant its accuracy, reliability or completeness, or accept any liability for any loss or damage (whether direct or indirect) arising out of the use of all or any part of this material. No representation or warranty should be made with regard to any computations, graphs, tables, diagrams or commentary in this material, which are provided for illustration/reference purposes only. The views, opinions, estimates and strategies expressed in this material constitute our judgment based on current market conditions and are subject to change without notice. JPM assumes no duty to update any information in this material in the event that such information changes. Views, opinions, estimates and strategies expressed herein may differ from those expressed by other areas of JPM, views expressed for other purposes or in other contexts, and this material should not be regarded as a research report. Any projected results and risks are based solely on hypothetical examples cited, and actual results and risks will vary depending on specific circumstances. Forward-looking statements should not be considered as guarantees or predictions of future events.
Nothing in this document shall be construed as giving rise to any duty of care owed to, or advisory relationship with, you or any third party. Nothing in this document shall be regarded as an offer, solicitation, recommendation or advice (whether financial, accounting, legal, tax or other) given by J.P. Morgan and/or its officers or employees, irrespective of whether or not such communication was given at your request. J.P. Morgan and its affiliates and employees do not provide tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any financial transactions.
IMPORTANT INFORMATION ABOUT YOUR INVESTMENTS AND POTENTIAL CONFLICTS OF INTEREST
Conflicts of interest will arise whenever JPMorgan Chase Bank, N.A. or any of its affiliates (together, “J.P. Morgan”) have an actual or perceived economic or other incentive in its management of our clients’ portfolios to act in a way that benefits J.P. Morgan. Conflicts will result, for example (to the extent the following activities are permitted in your account): (1) when J.P. Morgan invests in an investment product, such as a mutual fund, structured product, separately managed account or hedge fund issued or managed by JPMorgan Chase Bank, N.A. or an affiliate, such as J.P. Morgan Investment Management Inc.; (2) when a J.P. Morgan entity obtains services, including trade execution and trade clearing, from an affiliate; (3) when J.P. Morgan receives payment as a result of purchasing an investment product for a client’s account; or (4) when J.P. Morgan receives payment for providing services (including shareholder servicing, recordkeeping or custody) with respect to investment products purchased for a client’s portfolio. Other conflicts will result because of relationships that J.P. Morgan has with other clients or when J.P. Morgan acts for its own account.
Investment strategies are selected from both J.P. Morgan and third-party asset managers and are subject to a review process by our manager research teams. From this pool of strategies, our portfolio construction teams select those strategies we believe fit our asset allocation goals and forward looking views in order to meet the portfolio's investment objective.
As a general matter, we prefer J.P. Morgan managed strategies. We expect the proportion of J.P. Morgan managed strategies will be high (in fact, up to 100 percent) in strategies such as, for example, cash and high-quality fixed income, subject to applicable law and any account-specific considerations.
While our internally managed strategies generally align well with our forward-looking views, and we are familiar with the investment processes as well as the risk and compliance philosophy of the firm, it is important to note that J.P. Morgan receives more overall fees when internally managed strategies are included. We offer the option of choosing to exclude J.P. Morgan managed strategies (other than cash and liquidity products) in certain portfolios.
The Six Circles Funds are U.S.-registered mutual funds managed by J.P. Morgan and sub-advised by third parties. Although considered internally managed strategies, JPMC does not retain a fee for fund management or other fund services.
LEGAL ENTITY, BRAND & REGULATORY INFORMATION
In the United States, bank deposit accounts and related services, such as checking, savings and bank lending, are offered by JPMorgan Chase Bank, N.A. Member FDIC.
JPMorgan Chase Bank, N.A. and its affiliates (collectively "JPMCB") offer investment products, which may include bank managed investment accounts and custody, as part of its trust and fiduciary services. Other investment products and services, such as brokerage and advisory accounts, are offered through J.P. Morgan Securities LLC (“JPMS”), a member of FINRA and SIPC. JPMCB and JPMS are affiliated companies under the common control of JPM. Products not available in all states.
In Luxembourg this material is issued by J.P. Morgan Bank Luxembourg S.A (JPMBL), with registered office at European Bank and Business Centre, 6 route de Treves, L-2633, Senningerberg, Luxembourg. R.C.S Luxembourg B10.958. Authorised and regulated by Commission de Surveillance du Secteur Financier (CSSF) and jointly supervised by the European Central Bank (ECB) and the CSSF. J.P. Morgan Bank Luxembourg S.A. is authorized as a credit institution in accordance with the Law of 5th April 1993. In the United Kingdom, this material is issued by J.P. Morgan Bank Luxembourg S.A– London Branch. Prior to Brexit, (Brexit meaning that the UK leaves the European Union under Article 50 of the Treaty on European Union, or, if later, loses its ability to passport financial services between the UK and the remainder of the EEA), J.P. Morgan Bank Luxembourg S.A– London Branch is subject to limited regulation by the Financial Conduct Authority and the Prudential Regulation Authority. Details about the extent of our regulation by the Financial Conduct Authority and the Prudential Regulation Authority are available from us on request. In the event of Brexit, in the UK, J.P. Morgan Bank Luxembourg S.A– London Branch is authorised by the Prudential Regulation Authority, subject to regulation by the Financial Conduct Authority and limited regulation by the Prudential Regulation Authority. Details about the extent of our regulation by the Prudential Regulation Authority are available from us on request. In Spain, this material is distributed by J.P. Morgan Bank Luxembourg S.A., Sucursal en España, with registered office at Paseo de la Castellana, 31, 28046 Madrid, Spain. J.P. Morgan Bank Luxembourg S.A., Sucursal en España is registered under number 1516 within the administrative registry of the Bank of Spain and supervised by the Spanish Securities Market Commission (CNMV). In Germany, this material is distributed by J.P. Morgan Bank Luxembourg S.A., Frankfurt Branch, registered office at Taunustor 1 (TaunusTurm), 60310 Frankfurt, Germany, jointly supervised by the Commission de Surveillance du Secteur Financier (CSSF) and the European Central Bank (ECB), and in certain areas also supervised by the Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin). In Italy, this material is distributed by J.P. Morgan Bank Luxembourg S.A– Milan Branch, registered office at Via Cantena Adalberto 4, Milan 20121, Italy and regulated by Bank of Italy and the Commissione Nazionale per le Società e la Borsa (CONSOB). In addition, this material may be distributed by JPMorgan Chase Bank, N.A. (“JPMCB”), Paris branch, which is regulated by the French banking authorities Autorité de Contrôle Prudentiel et de Résolution and Autorité des Marchés Financiers or by J.P. Morgan (Suisse) SA, which is regulated in Switzerland by the Swiss Financial Market Supervisory Authority (FINMA).
In Hong Kong, this material is distributed by JPMCB, Hong Kong branch. JPMCB, Hong Kong branch is regulated by the Hong Kong Monetary Authority and the Securities and Futures Commission of Hong Kong. In Hong Kong, we will cease to use your personal data for our marketing purposes without charge if you so request. In Singapore, this material is distributed by JPMCB, Singapore branch. JPMCB, Singapore branch is regulated by the Monetary Authority of Singapore. Dealing and advisory services and discretionary investment management services are provided to you by JPMCB, Hong Kong/Singapore branch (as notified to you). Banking and custody services are provided to you by JPMCB Singapore Branch. The contents of this document have not been reviewed by any regulatory authority in Hong Kong, Singapore or any other jurisdictions. For materials which constitute product advertisement under the Securities and Futures Act and the Financial Advisers Act, this advertisement has not been reviewed by the Monetary Authority of Singapore. You are advised to exercise caution in relation to this document. If you are in any doubt about any of the contents of this document, you should obtain independent professional advice.
With respect to countries in Latin America, the distribution of this material may be restricted in certain jurisdictions. We may offer and/ or sell you securities or other financial instruments which may not be registered under, and are not the subject of a public offering under, the securities or other financial regulatory laws of your home country. Such securities or instruments are offered and/ or sold to you on a private basis only, Any communication by us to you regarding such securities or instruments, including without limitation the delivery of a prospectus, term sheet or other offering document, is not intended by us as an offer to sell or a solicitation of an offer to buy any securities or instruments in any jurisdiction in which such an offer or a solicitation is unlawful. Furthermore, such securities or instruments may be subject to certain regulatory and/ or contractual restrictions on subsequent transfer by you, and you are solely responsible for ascertaining and complying with such restrictions. To the extent this content makes reference to a fund, the Fund may not be publicly offered in any Latin American country, without previous registration of such fund´s securities in compliance with the laws of the corresponding jurisdiction. Public offering of any security, including the shares of the Fund, without previous registration at Brazilian Securities and Exchange Commission – CVM is completely prohibited. Some products or services contained in the materials might not be currently provided by the Brazilian and Mexican platforms.
J.P. Morgan Chase Bank, N.A. (JPMCBNA) (ABN 43 074 112 011/AFS Licence No: 238367) is regulated by the Australian Securities and Investment Commission and the Australian Prudential Regulation Authority. Material provided by JPMCBNA in Australia is to “wholesale clients” only. For the purposes of this paragraph the term “wholesale client” has the meaning given in section 761G of the Corporations Act 2001 (Cth). Please inform us if you are not a Wholesale Client now or if you cease to be a Wholesale Client at any time in the future.
JPMS is a registered foreign company (overseas) (ARBN 109293610) incorporated in Delaware, U.S.A. Under Australian financial services licensing requirements, carrying on a financial services business in Australia requires a financial service provider, such as J.P. Morgan Securities LLC (JPMS), to hold an Australian Financial Services Licence (AFSL), unless an exemption applies. JPMS is exempt from the requirement to hold an AFSL under the Corporations Act 2001 (Cth) (Act) in respect of financial services it provides to you, and is regulated by the SEC, FINRA and CFTC under US laws, which differ from Australian laws. Material provided by JPMS in Australia is to “wholesale clients” only. The information provided in this material is not intended to be, and must not be, distributed or passed on, directly or indirectly, to any other class of persons in Australia. For the purposes of this paragraph the term “wholesale client” has the meaning given in section 761G of the Act. Please inform us immediately if you are not a Wholesale Client now or if you cease to be a Wholesale Client at any time in the future.
This material has not been prepared specifically for Australian investors. It:
References to “J.P. Morgan” are to JPM, its subsidiaries and affiliates worldwide. “J.P. Morgan Private Bank” is the brand name for the private banking business conducted by JPM. This material is intended for your personal use and should not be circulated to or used by any other person, or duplicated for non-personal use, without our permission. If you have any questions or no longer wish to receive these communications, please contact your J.P. Morgan representative.
© 2019 JPMorgan Chase & Co. All rights reserved.
INVESTMENT PRODUCTS ARE: • NOT FDIC INSURED • NOT A DEPOSIT OR OTHER OBLIGATION OF, OR GUARANTEED BY, JPMORGAN CHASE BANK, N.A. OR ANY OF ITS AFFILIATES • SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED
Bank deposit products, such as checking, savings and bank lending and related services are offered by JPMorgan Chase Bank, N.A. Member FDIC. Not a commitment to lend. All extensions of credit are subject to credit approval.