JP Morgan cited the key interest rate as the most important economic issue in 2025 in its report.
“How low will the base rate go?”
The base rate is the most important keyword in all economic activities.
If the base rate goes down, lending rates will fall, reducing the cost of financing for companies and households, and increasing consumption and investment. Also, asset prices may rise.
JP Morgan predicts that interest rates will remain low until the first quarter of 2026.
The current US base interest rate is at 4.50-4.75%. Korea’s is at 3.25%. JP Morgan said that among the 37 global central banks for which it has statistics, 27 central banks are participating in the base interest rate cut procession. JP Morgan also said that the US base interest rate could be lowered to 3.5% by the first quarter of 2026. This means that the downward trend will continue for the time being.
What will happen if the global base interest rate is lowered for more than a year?
JP Morgan said that the base interest rate of 3.5% is enough to raise stock prices or high-yield bond prices. It is a level that does not put a big burden on prices. Looking at the world,
the effect of the base interest rate cut is more likely to be in advanced markets such as the US and Japan than in emerging markets.
This is a message to jump into the US or Japanese stock markets if you want to invest in stocks in 2025. One reason is the China risk. China is implementing economic stimulus measures, but retail sales are down 16% from pre-pandemic levels. This means that it is becoming harder for Chinese people to take money out of their pockets. Another burden is that President-elect Trump is threatening a war with China.
JP Morgan said to turn your attention to the S&P 500 ETF (exchange-traded fund) in the U.S. market.
This is because S&P 500 companies return 75% of their profits to shareholders through dividend payments or stock repurchases. In particular, while stock prices of the Magnificent 7, including Nvidia, Microsoft, Apple, Meta, and Tesla, have risen this year, it is predicted that all S&P 500 stocks will have significant upside potential next year.
But why did JP Morgan say that the outlook for developed markets was brighter?
Emerging market economies grew by an average of 4.3%, significantly outpacing advanced markets’ growth rate of 1.7%. However, there is still a low correlation between economic growth and corporate profits. For example, investors believe that profits increase when companies increase earnings per share (EPS) or return invested money through dividends,
but even when looking at China alone, emerging markets are less attractive. The Chinese economy has grown strongly over the past 10 years, but corporate profits have stagnated. In particular, Chinese companies are growing with government subsidies,
but even if sales increase, they often fail to generate large profits. In other words, earnings per share (EPS) are low.
Furthermore, the spread of protectionism and the resulting reorganization of supply chains are another hidden danger. It is becoming increasingly difficult to increase exports. JP Morgan cited India, Indonesia, and Taiwan as countries that are attracting attention in emerging markets.
JP Morgan predicted the following for major global markets:
First of all, the biggest risk for South America and Latin America is hyperinflation. This is because politics often intervened in central bank decisions. For example, Brazil’s President Lula criticized the central bank for holding onto money and increased fiscal spending. As a result, the inflation rate approached 5%, and the Brazilian central bank is hastily raising interest rates.
If other countries lower interest rates, raising interest rates will inevitably lead to a slowdown in domestic demand and weakening export competitiveness. This is because lending rates rise and the value of the currency strengthens. However, the fact that the United States is looking for nearby outsourcing countries as it reorganizes its supply chain is a positive factor for the South American economy.
Europe is facing supply chain disruption and an economic slowdown.
Similar trends are likely to continue next year. The European manufacturing purchasing managers’ index (PMI) has been below the baseline of 50 since 2022, and in particular, Germany, which accounts for about 25% of the eurozone economy, has a PMI in the early 40s. This means that the possibility of an economic recovery is low.
Purchasing Managers’ Index/PMI, PURCHASING MANAGERS’ INDEX
An economic indicator calculated by surveying purchasing managers (procurement managers). 0 means a decrease in economic activity, and 100 means an increase. If it’s 50? It means there is no significant change.
In addition, productivity is also decreasing. Labor productivity in Europe is about 4% lower than the pre-pandemic forecast, and it is said that the European economy suffered a production loss of about 2.2 trillion euros (3,220 trillion won) from 2019 to 2024. The diagnosis is that economic dynamism is not as strong as that of the United States, and workers take more breaks than Asians.
However, there are some expectations. Europe has a significant share of the AI value chain. In particular, the European Union has announced that it will invest $20 billion annually in AI. The AI industry is likely to benefit. Examples include ASML in the Netherlands, Infineon Technologies in Germany, and STMicro in France and Italy.
Europe is also worth keeping an eye on as it continues to invest in energy infrastructure, aerospace, and defense industries. Another positive factor is China’s economic stimulus package. Europe is China’s second largest trading partner, so there is an outlook that if China implements an economic stimulus package, the warmth will spread to Europe.
Finally, the United States is diversifying its portfolio. The explanation is that there is still no alternative market for the United States that is as good as Europe.