J.P. MAM slashes recession probability to 30%

J.P. Morgan Asset Management has slashed the probability of a recession eventuating in 2025 in half to 30% amid relief from the latest tariff announcements, but it warns risks remain elevated.

Last week, US President Donald Trump substantially lowered tariffs on Chinese imports from 145% to 30%. China, on the other hand, reduced its tariffs on US imports to 10% from 125%

Rob Stewart, the head of multi-asset solutions international at J.P. MAM, said previously the effective net tariff rate for the US for all its trading partners averaged about 24%.

"With the latest announcement, it's come down to about 13% to 14%. But that's still a big impact that's going to be a drag on the US consumer," he said, pointing out that this is equivalent to about US$470 billion in tax hikes and will potentially impact the country's GDP growth.

In early April, J.P. Morgan raised the probability of a recession occurring in 2025 to 60%.

Based on first quarter activities in the US, companies were front loading their imports while negative GDP growth surfaced.

"We think that'll probably bounce back in Q2," Stewart told Financial Standard.

"Now, we've reduced our probability of a recession down to about 30%."

While that is "much better news", he warns that risks remain elevated compared to a normal year.

At the beginning of the year, the fund manager was long equities, particularly US equities.

But since Liberation Day, its overall equity position has moved from overweight to neutral, maintaining small, long positions in Europe, UK and Japan - effectively diversifying out of US equities.

US equities have also been slapped with a "flat" rating to a "slightly negative".

"We think that is appropriate for now, because if you think about what's driving the markets, the markets have focused on the very short term, and [specifically] on policy announcements and the like," Stewart said.

For bonds, the portfolio has moved to be slightly long duration.

"It's a protective measure with the potential for slower growth means that the bond market could start to rally from here. In fixed income, we're also long high yield, so we prefer to take some risk in high yield," he said.

In essence, Stewart believes it is important now more than ever to hold a diversified portfolio.

"The 60-40 balanced portfolio gives you diversification, as long as the correlation to equity in bonds isn't one, then you're going to get that diversification," he said.

"We've been through a very good period for balanced portfolios over the past 10-plus years where the correlation between equity and bonds has been negative. We've moved now to more neutral-to-positive. The inflation scare of 2021-22 saw correlation become positive for bonds and equities. So, we got less diversification. Now, we're back down closer to zero."

If correlations stay close to zero and don't stray beyond -0.3 and +0.3, Stewart adds that there's good diversification to be had.

Financial Standard was a guest at the J.P. Morgan Asset Management 2025 Media Summit.