J.P. Morgan: Although the Middle East issue remains unresolved, a path to negotiation is visible; the macro focus has shifted from risk premium to residual "stagflation" risk.

J.P. Morgan: Although the Middle East issue remains unresolved, a path to negotiation is visible; the macro focus has shifted from risk premium to residual "stagflation" risk.

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The main theme of Asian stock markets in April appeared to be AI-driven acceleration, but this strategy report from JPMorgan casts the lens further: the Middle East conflict has not “ended,” and the real change lies in the market’s pricing of worst-case scenarios beginning to converge—after the risk premium from tail supply shocks ebbs, macro trading returns to the trickier “aftershocks.”

Rajiv Batra of JPMorgan’s global market strategy team wrote in the latest report on Friday: “The Middle East situation remains unresolved (if it persists, could bring non-linear risks to commodity supply), but the path to negotiated resolution is clearer... The macro focus has shifted from risk premium to residual ‘stagflation.’”

Behind this statement is a chain of reasoning: the first round of “risk aversion/risk premium” trading brought by the conflict has largely been digested, but higher commodity prices and tighter financial conditions as a result will create a longer-lasting combination of growth and inflation—more like a “stagflationary” backdrop, rather than the more “Goldilocks”-like macro environment before the conflict.

Under this framework, the divergence in stock markets will become more pronounced: aside from commodity stocks, capital will be more inclined to stay in structurally driven sectors that are less sensitive to the economic cycle yet can continue to deliver growth (JPMorgan uses the term Quality-Growth here), especially investments related to AI and “security/resilience”; by contrast, energy-sensitive and purely cyclical sectors will be underweighted. The strategy takeaway is straightforward: overweight the Asia tech supply chain and Taiwan, and reduce exposure to India and other markets more constrained by the “stagflation aftershock.”

A Clearer Negotiation Path: The “Odds” of Tail Supply Shocks Are Falling

JPMorgan does not simply classify the Middle East issue as “risk removed.” Their keyword is “unresolved,” but they also emphasize the “negotiation path is visible,” reasoning that both sides are constrained, narrowing the range of imaginable outcomes.

This will change market pricing: as the “range” narrows, the initial risk premium paid for extreme scenarios (especially reflected in assets tied to commodity supply and cross-asset risk-off sentiment) is no longer the sole macro driver.

Notably, the report retains an important caveat: if the conflict drags on, commodity supply may still face “non-linear” risks—risks that are not obvious most of the time but, once triggered, can suddenly jolt prices. However, in the short term, this is no longer the “only story” around which the market revolves each day.

After the Risk Premium Fades, the Market Must Digest the “Stagflation Aftershock”

The fading of the risk premium does not mean the macro environment returns to normal. JPMorgan’s core concern lies in the “aftereffects”: higher commodity prices and tighter financial conditions will drag on growth while anchoring inflation and rates at higher levels.

The clues given in the report are clear: though energy prices have eased, they remain above pre-conflict levels; major foreign bond yields also remain higher (the report notes they are still about 40-50 basis points above pre-conflict levels), and the stock-bond correlation has flipped positive and stayed so since the conflict began—this kind of combination typically corresponds to a macro structure where “inflation and rates again constrain risk assets.”

In other words, the market has shifted from “should we pay a premium for supply disruptions” to “even if supply is not disrupted, where will costs and interest rates persist.” This is what JPMorgan calls the “residual stagflation risk”: it may not make explosive headlines every day, but it is more likely to persistently affect asset performance via profit margins, financing costs, and slower-moving demand variables.

From “Goldilocks” to “Two-Speed Economy”: The Key to Style Rotation

JPMorgan defines the current environment as a “two-speed economy.” The meaning is straightforward: some assets (with structural growth, less sensitive to macro) continue to run; others (dependent on economic expansion, more sensitive to rates and energy) struggle to return to the pre-conflict pace.

They explicitly distinguish this environment from the pre-conflict “Goldilocks” (broad growth, moderate inflation, policy support) and therefore offer style judgments:

  • Beneficiaries: Apart from commodity stocks, focus more on structurally driven opportunities related to AI and security/resilience;
  • Underperformers: Reduce weightings of energy-sensitive and more typical cyclical and consumer sectors (the report specifically names cyclical/consumer themes not tied to AI or security/resilience as more likely to underperform).

This is also the practical meaning of the “shift in macro focus” in the title: as macro no longer centers on “event-driven risk premiums” but on “persistent stagflation aftershocks,” the market is more like answering a sorting question—who can continue to deliver certain growth in an environment of higher rates and costs.

Strategy Adjustment Table: Increase Exposure to Taiwan/Tech, Lower India to Neutral (Key Points Only)

In the strategy section, JPMorgan’s moves revolve around the macro framework above:

  • Tech and Taiwan upgraded again to Overweight, extending preferred tech coverage from South Korea/China to Taiwan; also raising the benchmark/bull/bear targets for the Taiwan Weighted Index (TWSE) to 43,000/48,000/36,000.
  • India downgraded to Neutral, for reasons including: relative valuation premium over emerging markets remains high, profit pressure from energy supply disruptions, “dilution” issues from financing and issuance, and limited index exposure to next-gen tech (AI, data centers, semiconductors, etc.).
  • For industry and regional allocation, they generally lean toward commodities and quality growth: maintain preferences for Korea, Taiwan, China, as well as energy, materials, and financials, while lowering some consumer discretionary and communication services sector ratings; they also caution that flows into markets like Taiwan are crowded and may consolidate first in the short term, but remain biased toward a “continued upward trajectory” for Asian equities overall.

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