JPMorgan Asset Management
- Karen Ward, the chief market strategist for the UK and Europe at JPMorgan’s $1.7 trillion asset management arm, says rising inflation is the biggest risk to global markets right now.
- Most forecasters and policymakers see a gradual return of inflation over coming years, but problems could arise if it rises faster than is currently expected.
- Markets are buoyant, but “thoughts will turn towards a much less risk favourable environment quite quickly” if inflation jumps quicker than forecast.
LONDON — As the world’s finance ministers and central bank officials meet at the World Economic Forum in Davos next week, there should be just one worry on their mind when it comes to markets – inflation.
According to Karen Ward, a senior strategist at JPMorgan’s $1.7 trillion asset management arm, inflation is the biggest risk facing the world’s buoyant financial markets in 2018.
Ward — who is the chief market strategist for the UK and Europe at JPMorgan Asset Management — said the return of inflation, which has been dormant around the world in the post-financial crisis years, will pose the biggest challenge to the ongoing recovery of the global economy this year.
“That’s an easy one. It’s inflation,” Ward said when asked what she sees as the biggest challenge to the markets right now.
In the years since the financial crisis,inflation worldwide — particularly in developed countries — has been stuck, struggling to get off the ground.Price growth in the USA and eurozone has even dropped into negative territory at times.
Most central banks and commentators are of the belief that core inflation is now slowly returning, and will continue to do so gradually over the coming years, allowing them to tighten the incredibly loose monetary policy that has predominated since the crisis by increasing rates and winding down their quantitative easing programmes.
“The central banks have assumed that inflation will pick up very gradually and will all be very moderate, and therefore that they can exit these extraordinary policies in a very gradual, contained, predictable fashion. That’s really what they’re trying to achieve at the moment,” Ward told BI.
“They’ve given us this very detailed forward guidance in every region — whether its the Fed telling us what their best guess is for hiking and running off the balance sheet, or the ECB trying to be as predictable as possible [by using a communication strategy designed to telegraph policy changes far in advance of their implementation].
“But all of this is predicated on inflation behaving itself [by rising in a gradual and steady manner].
This, Ward says, is where problems could crop up. What happens if inflation returns quicker than expected, she asks.
“The big debate that has existed over the past few years is whether inflation is dead or sleeping.
“If actually, we find out that inflation was sleeping and has woken up with a bit more vigour than we perhaps anticipate, then immediately attention would turn to whether central banks are behind the curve. Will they have to act more dramatically? I think then, thoughts will turn towards a much less risk-favourable environment quite quickly.”
Ward’s comments came during an interview in which she argued that lagging business investment, caused by the uncertainty over Brexit, will be the biggest challenge for the British economy in 2018.
“One area of weakness in the UK, certainly relative to what we’re seeing elsewhere, is on investment. I think clearly the uncertainty with regards to the Brexit negotiations is playing a significant role there,” she said.
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