This country just entered recession, but it doesn’t worry one JP Morgan strategist

There’s one country JP Morgan’s global market strategist Kerry Craig is especially optimistic about as markets weigh up the trajectory of interest rates and Australian investors wade through a deluge of earnings this month.

It’s the one place where he says a rate hike is not off the cards and where most central banks’ public enemy number one: inflation, is a welcome spectre.

JP Morgan strategist Kerry Craig says the RBA is unlikely to start cutting rates until at least towards the end of this year.
JP Morgan strategist Kerry Craig says the RBA is unlikely to start cutting rates until at least towards the end of this year.Credit: Jason South

Japan, which has faced a persistent deflation problem for years, is a promising market over the longer-term, he says, even as data last week showed the country slipped into a recession at the end of last year, losing its spot as the world’s third-biggest economy.

“This might delay the Bank of Japan normalising policy for a little longer,” Craig says, referring to the central bank’s decade-long ultra-loose monetary policy.

But with a good tourism rebound and demand building internally, he says Japan is well-placed.

“We really like what’s happening there,” he says. “Because you’ve got inflation moving up, growth that’s going to improve, and the Bank of Japan, which is going to hike rates this year, hopefully moving out of negative interest rates, which will remove some of the financial repression that’s weighed on their banks.”

Japan slipped into recession at the end of 2023, figures showed last week.
Japan slipped into recession at the end of 2023, figures showed last week.Credit: iStock

Craig says interest rate hikes are unlikely across virtually all other major economies.

While the Reserve Bank has been relatively hawkish in its commentary, he says it’s probably a way for the bank to manage expectations and discourage the market from easing financial conditions too soon before inflation is firmly under control.


“The Reserve Bank is not ruling out completely the fact they might hike rates, but I think that’s more to address market pricing with bringing forward those rate cuts,” he says. “Our view is that the RBA is probably not going to start cutting rates until very late this year, but more likely early into next year.”

At the start of February, markets were pricing in an 85 per cent chance of a rate cut by June.

But with Australia’s inflation rate at the higher end of the developed market, Craig says the pressure on real wages could still weigh on the consumer.

“We tend to be a little bit more defensive when it comes to the Australian market,” he says, noting sectors such as healthcare could be more attractive than consumer-facing stocks.

Craig says some economies such as the US have been more resilient than expected amid higher interest rates, leading to reassessments about how fast rate cuts might be expected.

“There’s now a reassessment about whether the US economy has been too resilient to higher interest rates, and whether it will take longer for the inflation outlook to come down,” he says. “That may mean a delay in the standard rate cutting cycle, and the market will have to adjust for that.”

A global recession is not on the cards right now, Craig says, partly because economies around the world are in different stages of the business cycle.

“China is still having some trouble trying to re-accelerate its growth profile,” he says, while the US is slowing, and Europe shows potential for acceleration as it flirts with recession. “There is enough growth around the world to come through, especially as you get easier policy and financial conditions.”

Craig says the increased prospect of rate cuts led to a “big momentum run-up” in equity markets at the end of last year, and into the start of this year, as valuations improved on the back of lower bond yields. The Australian sharemarket, for example, reached a record high earlier this month.

While Craig notes equity valuations are above their long-term averages, and that earnings growth will need to be delivered to justify further upwards momentum, he says the valuations are not excessive.

“We’re not overly concerned the market has got to this level so quickly,” he says. “If you look back historically, markets tend to make new highs more frequently than they make new lows.”

In fact, Craig thinks there’s room for Australian equities to exceed earnings expectations. “The consensus numbers that we look at are pretty low relative to our own, so you could see some upside surprise,” he says.

Having grown up in New Zealand where he worked in government and trade policy for several years, Craig joined JP Morgan as a strategist 14 years ago from a pension fund in London before moving to Australia in 2015.

The now Melbourne-based strategist says he has worked through several crises, including the GFC, the Eurozone debt crisis while living in London, and the pandemic, and that while each has been different, he has benefited from adopting a longer-term perspective.

“If we look back over history, often what feels painful and … the uncertainty, very much fade away over the coming months,” he says. “You’ve got two best friends when it comes to thinking about markets, and it’s time and diversification. Those two things can heal a lot of wounds when it comes to painful periods in markets.”

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