(Mar 30): Strategists at JPMorgan Chase & Co have concluded that most risk assets – a universe that typically includes stocks and credit – have seen their low points for the recession that’s gripped economies around the world.
Conditions that JPMorgan had set for market stabilization and revival have largely been met, with recession-like pricing, a reversal in investor positioning and extraordinary fiscal stimulus, strategists led by John Normand wrote in a note Friday. Coronavirus infection rates remain a “wild card,” as they remain high even if they’re “slowing” in the US and Europe.
“Risky markets should remain volatile as long as infection rates create uncertainty about the depth and duration of the Covid recession, but enough has changed fundamentally and technically to justify adding risk selectively,” Normand wrote. “Most risky markets have probably made their lows for this recession, except perhaps oil and some EM currencies beset by debt-sustainability issues.”
Most risk assets should trade higher in the second quarter of the year, Normand said. He recommends that investors average into oversold markets, particularly those where central banks are buying directly. (Averaging into markets entails spreading out the purchases over time rather than diving in in one go.)
Not everyone sees the bottom as necessarily in.
Goldman Sachs Group Inc.’s David Kostin reiterated in a note Friday that he expects the market to turn lower in coming weeks. He cited a checklist for a sustained rally similar to Normand’s – of slowing viral spread, evidence that fiscal and monetary policy stimulus is working, and a bottoming in investor positioning and flows.
Gavekal Research Ltd.’s Anatole Kaletsky said in a note Monday that it’s too early to buy equities, citing reasons including “surprisingly complacent” investor sentiment and historical data showing bear markets almost never end on a single massive sell-off without retesting the bottom.
Off the Low
The MSCI All Country World Index tumbled some 34% from its February record high to its recent low on March 23. As of early London trading Monday, it had recouped more than quarter of that loss.
Normand said his approach dovetails with the recommendations in the past week from bottom-up analysts at JPMorgan to add exposure in US and European credit, peripheral European sovereigns, and US and European inflation breakevens.
On the stocks side, things are somewhat more nuanced. JPMorgan’s multi-asset portfolio has been overweight equities all year, though partially hedged with short positions in credit and long ones in the US dollar.
“Thus, future adjustments would be in terms of magnitude and funding source rather than in overall tilt,” Normand said. He added that the firm’s global equity strategists “believe that the risk-reward for equities remains skewed to the downside” because relief rallies will be faded.
Normand cautions that not all apparently cheap markets should be bought, as there is still a risk-reward spectrum. Developed-market bonds should be used to fund allocations to cheap credit and equities, but bond sell-offs should also be used as opportunities to buy duration as insurance against the next shock.
Credit generally has higher risk-adjusted returns than equities, so in volatility-adjusted terms may be superior in the market bottoming process over the coming weeks, Normand said.
