J.P. Morgan: Although the Middle East issue is unresolved, a negotiation path can be seen, and the macro focus has shifted from risk premium to residual "stagflation" risk.

The main theme of the Asian stock market in April seems to be the accelerated rise of AI, but this strategy report by J.P. Morgan takes a broader view: the Middle East conflict has not "ended", but the real change lies in the market beginning to converge on pricing for the worst-case scenario - after the risk premium from the tail supply shock recedes, macro trading returns to the more difficult "aftermath." Rajiv Batra of J.P. Morgan's global market strategy team wrote in the latest report on Friday, "The situation in the Middle East is not yet resolved (which may bring nonlinear risks to commodity supplies), but the path to negotiated settlement is clearer... the macro focus has shifted from risk premium to residual 'stagflation.'" Behind this statement is a chain of judgments: the first round of "risk aversion/risk premium" trading caused by the conflict has largely been digested, but higher commodity prices and the resulting tighter financial conditions will leave a longer-lasting combination of growth and inflation - more like a backdrop of "stagflation" rather than the macroeconomic environment closer to a "golden-haired girl" before the conflict. In this framework, the differentiation in the stock market will be sharper: aside from commodity stocks, funds are more willing to stay in structural growth tracks that are less sensitive to the economy but can sustain growth, especially investments related to AI and "security/resilience"; on the other hand, energy-sensitive, purely cyclical sectors will be weighted lower. At the strategic level, the focus is clear: increase exposure to Asia's tech supply chain and Taiwan, while reducing exposure to India and other areas more constrained by "aftermath of stagflation." Clearer negotiation path: tail-end supply shock "odds" are decreasing J.P. Morgan does not simply categorize the Middle East issue as "risk mitigation." Their key words are "not yet resolved," but they also emphasize that the "negotiation path is visible" because both parties have constraints that narrow the range of possible outcomes. This will change the way the market is priced: when the range narrows, the risk premium paid for extreme scenarios (especially reflected in assets related to commodity supply and in cross-asset risk aversion sentiment) is no longer the macro's dominant variable. It is worth noting that the report still retains an important footnote: if the conflict lingers, there may still be "nonlinear" risks to commodity supplies - those risks that are not usually conspicuous but could have a jump-impact on prices once they occur. However, in the short term, it is no longer the "sole story" that the market revolves around every day. After the risk premium fades, the market will have to digest the "aftermath of stagflation" Fading risk premium does not mean macro is back to normal. J.P. Morgan's core concern is the "aftermath": higher commodity prices and tighter financial conditions will hamper growth and keep inflation and interest rates "sticky" at higher levels. The clues provided in the report are clear: while energy prices have fallen somewhat, they remain higher than before the conflict; bond yields in major overseas markets remain at higher levels (about 40-50 basis points higher than before the conflict, according to the report), and the correlation between stocks and bonds has turned positive after the conflict and continues to stay in positive territory - these combinations typically correspond to macro structures where "inflation and interest rates become constraints on risk assets." In other words, the market has shifted from "should we pay a premium for disruptions in supply" to "even if there are no disruptions in supply, where will costs and interest rates settle." This is what J.P. Morgan refers to as "residual stagflation risk": it may not make explosive headlines every day, but it is more likely to continue affecting asset performance through variables such as profit margins, financing costs, and slow changes on the demand side. From a "golden-haired girl" to a "two-speed economy": the key to changing style J.P. Morgan defines the current environment as a "two-speed economy." The meaning is straightforward: some assets (with structural growth and less sensitivity to macro trends) continue to perform well, while other assets (dependent on economic expansion and more sensitive to interest rates and energy) struggle to return to the pace before the conflict. They clearly distinguish this environment from the pre-conflict "golden-haired girl" (growth spreading, mild inflation, policy support) and make style judgments based on this: Beneficiaries: Apart from commodity stocks, more focus should be on structural opportunities related to AI and security/resilience; Pressure points: Lower weighting on energy-sensitive and more typical cyclical and consumer sectors (the report also points out that cyclical and consumer themes not tied to AI or security/resilience are more likely to underperform). This also represents the real meaning of the "shift in macro focus" in the title: when the macro is no longer driven by "event-driven risk premiums" but by "persistent aftermath of stagflation," the market is more like a screening question - who can continue to provide certainty in growth under higher interest rates and costs. Summary of strategy adjustments: Overweight China, Taiwan/tech, neutral on India (until further notice) In the strategy recommendations section, J.P. Morgan's actions revolve around the macro framework outlined above: Tech and China Taiwan are raised to Overweight, with a preference for tech expanding from South Korea/China to Taiwan; while the Taiwan Weight Index (TWSE) benchmark/bull/bear scenario targets are raised to 43,000/48,000/36,000. India is lowered to Neutral, with reasons including: high valuation premium relative to emerging markets, profit pressure from energy supply disruptions, concerns about dilution from financing and issuance issues, and lack of exposure to next-generation technologies (AI, data centers, semiconductors, etc.) at the index level. In terms of industry and regional allocations, they are generally more tilted towards commodities and quality growth: maintaining a preference for South Korea, China Taiwan, China, as well as energy, materials, and finance sectors, while downgrading some consumer discretionary and communication services sectors; and suggesting that localized trading, like in Taiwan, may consolidate in the short term, but overall, the Asian stock market is still likely to continue on an "upward trajectory." This article is sourced from "Wall Street SeeWitness," authored by Pan Lingfei. GMTEight edited by Chen Qiuda.