While the dominant narrative for Asian stock markets in April appeared to be the rapid ascent of AI, this strategy report from JPMorgan Chase takes a broader view: the Middle East conflict has not "ended," but the real change lies in the market's pricing of worst-case scenarios beginning to converge. As the risk premium for tail-end supply shocks recedes, macro trading is returning to the more persistent "aftermath."
Rajiv Batra of JPMorgan's Global Market Strategy team wrote in a report released Friday: "The Middle East situation remains unresolved (a prolonged conflict could pose non-linear risks to commodity supplies), but the path to a negotiated resolution is clearer... The macro focus has shifted from risk premiums to residual 'stagflation'."
This statement is backed by a chain of reasoning: the initial round of "risk-off/risk premium" trading spurred by the conflict has largely been digested. However, higher commodity prices and the resulting tighter financial conditions will leave behind a growth-inflation mix that persists for longer—creating a backdrop more reminiscent of "stagflation" than the pre-conflict "Goldilocks" macroeconomic environment.
Within this framework, divergence in equity markets will become more pronounced. Beyond commodity stocks, capital shows a greater preference for structural themes that are less sensitive to the economic cycle but can deliver sustained growth (JPMorgan uses the term Quality-Growth), particularly investments related to AI and "security/resilience." Conversely, energy-sensitive, purely cyclical sectors are likely to see reduced weighting. The strategic implication is direct: increase exposure to Asian tech supply chains and Taiwan, while reducing exposure to markets like India, which are more constrained by the "stagflation aftermath."
The path to a negotiated resolution is clearer, reducing the "odds" of a tail-end supply shock.
JPMorgan does not simplistically categorize the Middle East issue as "risk-off." Their key phrase is "not yet resolved," but they simultaneously emphasize that a "negotiation path is visible," citing constraints on both sides that narrow the range of plausible outcomes.
This alters market pricing dynamics: as the "range" narrows, the risk premium initially paid for extreme scenarios (particularly evident in assets linked to commodity supply and cross-asset避险 sentiment) ceases to be the sole dominant macro variable.
Notably, the report retains an important caveat: if the conflict drags on, "non-linear" risks to commodity supply could still materialize—risks that are usually dormant but can cause a sudden, jump-like impact on prices if triggered. In the short term, however, this is no longer the "only story" the market revolves around daily.
As the risk premium fades, the market must digest the "stagflation aftermath."
The fading of the risk premium does not equate to a return to normal macro conditions. JPMorgan's core concern lies in the "aftereffects": higher commodity prices and tighter financial conditions will act as a drag on growth while keeping inflation and interest rates "sticky" at elevated levels.
The report provides clear indications: although energy prices have retreated, they remain above pre-conflict levels; bond yields in major overseas markets are sustained at higher levels (the report notes they are still about 40-50 basis points higher than pre-conflict levels); and the stock-bond correlation turned positive after the conflict erupted and has remained in positive territory. Such a combination typically corresponds to a macro structure where "inflation and interest rates re-emerge as constraints on risk assets."
In other words, the market is shifting from "whether to pay a premium for supply disruption" to "even without disruption, where will costs and interest rates settle?" This is what JPMorgan terms "residual stagflation risk": it may not create explosive headlines daily but is more likely to persistently affect asset performance through margins, financing costs, and slow-moving demand-side variables.
From "Goldilocks" to a "two-speed economy": The key to style rotation.
JPMorgan defines the current environment as a "two-speed economy." The meaning is straightforward: one segment of assets (those with structural growth and low sensitivity to the macro cycle) continues to advance; another segment (those reliant on economic expansion and more sensitive to interest rates and energy) finds it harder to return to their pre-conflict rhythm.
They explicitly distinguish this environment from the pre-conflict "Goldilocks" scenario (broad-based growth, moderate inflation, policy support) and base their style judgments on this:
Beneficiaries: Beyond commodity stocks, focus should be on structural opportunities related to AI and security/resilience. Pressured Sectors: Reduce weightings in energy-sensitive sectors, as well as more typical cyclical and consumer segments (the report also notes that cyclical and consumer themes not linked to AI or security/resilience are more likely to underperform).
This is the practical meaning behind the "shift in macro focus" mentioned in the title: as the macro driver shifts from "event-driven risk premiums" to "persistent stagflation aftermath," the market increasingly resembles a screening exercise—identifying which assets can continue to deliver certain growth under higher interest rates and higher costs.
Summary of strategic adjustments: Overweight Taiwan/Tech, India downgraded to Neutral.
The strategic recommendations from JPMorgan are framed around the above macro outlook:
Technology and Taiwan have been upgraded back to Overweight, with the preferred tech scope expanding from Korea/China further to include Taiwan; simultaneously, the base/bull/bear scenario targets for the Taiwan Weighted Index (TWSE) have been raised to 43,000 / 48,000 / 36,000. India has been downgraded to Neutral. Reasons cited include: high valuation premiums relative to other emerging markets, earnings pressure from energy supply disruptions, "dilution" issues stemming from financing and IPOs, and insufficient index-level exposure to next-generation technologies (AI, data centers, semiconductors, etc.). Regarding sector and regional allocation, they maintain an overall preference for commodities and quality growth: retaining positive views on Korea, Taiwan, China, and the Energy, Materials, and Financials sectors, while downgrading ratings on some Consumer Discretionary and Communication Services sectors. They also note that localized crowding in markets like Taiwan might lead to consolidation in the short term, but they maintain a general bias for Asian equities to continue on an "upward trajectory."
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