Question: How big a threat are stagflation and rising interest rates to the global economy?

Answer: Inflation is a topic that is top of mind, and we are seeing central banks around the world taking action to calm rising prices. We saw the [United States] Federal Reserve hiking interest rates by 75 basis points this week, the first time we have seen a move to this extent by the US central bank in 28 years. And they are not done yet; at JP Morgan, we are expecting another 1.50 percentage point rate increase this year over the next four Fed meetings.

So, we are facing a scenario of active quantitative tightening, where liquidity around the world is being removed at the same time, and it’s too early to predict how this exercise will pan out.

One thing we know for sure is that markets will continue to stay volatile over the next 12 to 18 months.

JPMorgan Chase CEO Jamie Dimon warned recently of an economic “hurricane”. How bad will things get? 

To qualify what Jamie said when he referred to the risk of storm clouds coming – he was referring to two sets of forces that could come to a head. On the one hand, we have a very strong US economy, where consumers could continue to drive up inflation at a time when we are already facing sharply rising costs of commodities given the Russia-Ukraine conflict. On the other hand, we are facing unprecedented quantitative tightening, and it’s unclear if we will get a positive outcome.

So, depending on how the forces come together and play out, we could see three scenarios: a soft landing, where we face slower growth, a mild recession that will last for less than a year with slightly higher unemployment and moderating inflation, or a less benign scenario whereby the recession could be prolonged or the geopolitical tensions could escalate further and create more disruptions around the world.

So, things could go in different ways. I think there is one scenario that could be bad for the rest of the world that would be bad for Southeast Asia as well, which is this scenario of stagflation, whereby inflation remains elevated and you have a recession.

How will this impact the Indonesian economy?

The Indonesian consumer has been partially shielded from the rising price of commodities because of the fuel subsidies. At the same time, the super commodity cycle is helping the Indonesian economy, which has a very strong balance of payments with reduced foreign ownership of government bonds.

Inflation remains within Bank Indonesia’s target; we see the central bank for now tightening liquidity with a series of reserve requirement hikes and do not expect any interest rate hikes until July.

What is JP Morgan’s outlook for Asia Pacific and Indonesia’s capital markets in the short term?

Clearly, it’s been a challenging time for the capital markets in the Asia Pacific region, and this applies to both the equity capital markets (ECM) as well as the debt capital markets (DCM).

Having said that, for the DCM, we have still been able to find windows to access the markets for our issuers in spite of the volatility. Some of these windows are extremely short.

For the ECM, we may see some appetite after the summer, but perhaps not before a stabilization of markets where both issuers and investors can find comfort in coming back to the table.

Specific to Indonesia – like the rest of the region, we see market challenges in the short term due to market volatility. In the long term, however, we maintain a positive outlook for deals in this market. Indonesia’s digital economy is booming and the market has become a strong breeding ground for tech unicorns.

What’s your view on Indonesian unicorns who want to go public and attract foreign investors?

Indonesia, with its sizable population and young demographic, will remain the most attractive SEA market for growth investors. There are several Indonesia unicorns with a strong business case and appeal, and we expect to see more of these IPOs [initial public offerings]. The US market has and will remain a viable option for these unicorns, but in short term, we do think local market IPOs may be more straightforward.

What trends will shape the future of the banking sector in the Asia Pacific region?

There are a number of what we call mega trends in banking in Asia Pacific that present opportunities that JP Morgan is focused on.

First is the growth of the intra-Asia Pacific trade corridor, which is almost as lucrative as the US-China corridor and worth around US$5 trillion, as corporates headquartered in the region continue their overseas expansion.

Second, we are seeing tremendous growth within the pension fund industry. If you look across the region, the largest pension fund in the world is in Japan, while the growth of the superannuation industry in Australia has been incredible. We expect more than one-third of the top 20 global pension funds will eventually be based in Asia.

Third, of the large corporates in the region, about a third of those publicly listed are still family-owned, compared with just a single-digit percentage in the United States. This implies huge potential for transactions in the future. And they won’t be limited to IPOs; increasingly, we are seeing a lot of activity in the private markets like pre-IPO financing pipe deals, which are becoming more popular than a few years ago.

What about digital banks? How does JP Morgan see this space evolving in Asia Pacific as well as in Indonesia?

The growth of digital banks is an emerging trend across the region, with almost every market handing out digital licenses, from Hong Kong to Singapore, Thailand, Malaysia and Indonesia.

Our view is that every bank today needs to have a digital footprint to stay relevant. It’s an exciting space where we are seeing new entrants like digital-only banks and fintechs driving competition across product offerings, regulators stepping in, the use of blockchain for transfer of payments as well as the development of central bank digital currencies.

For JP Morgan, we have certainly benefitted from the evolution. We never had retail banking operations outside of the US until last year, when we launched our digital retail bank in the United Kingdom and also acquired a stake in a Brazilian bank called C6. Technology has given us the opportunity to assess if this is a sustainable business model. So, we are exploring and watching this space closely.

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