It’s time to start adding risk. Or at least in market segments that may have overshot to the downside.
That’s according to JPMorgan’s Marko Kolanovic who, in a note out Thursday, suggested the de-frothing seen in some “bubble sectors” has mostly run its course. Geopolitical risk, he said, “will likely start abating in a few weeks’ time” even if “a comprehensive resolution” to the conflict in eastern Europe “may take a few months.”
To be sure, Kolanovic was quick to note that duration-sensitive equities and some bond proxies are still expensive. He mentioned US mega-caps, defensives and low vol shares. With that caveat, he cited what he described as “great opportunities” in a hodgepodge of “high beta, beaten down” corners of the market, including “innovation, tech, biotech, emerging markets” and small-caps, all of which he said are “pricing in a severe global recession.” In Marko’s view, a deep downturn isn’t likely to materialize. He did note that the odds of recession in Europe have risen and alluded to an incrementally less constructive outlook for US growth.
Kolanovic has, of course, repeatedly identified bubbles across some of the market segments that suffered the most over the past several months. Additionally, Marko warned of an energy crisis more than a year ago, and variously suggested commodities were on the brink of a supercycle. In November, he wrote that if crude prices were to return to the median historical level relative to global stocks, bonds and commodities, “oil would need to be trading at ~$115/bbl.” A little over three months later, crude traded as high as $139.
Some bubble segments are nearing “the end of the correction and in some areas represents a liquidity-driven overshoot,” Marko said Thursday. In some areas, he went on to remark, shares are trading with record-low valuations “including previous recessions” and stretches when rates were far higher than they are today.
Obviously, energy shares have run pretty far, pretty fast. Indeed, I’ve been taken aback by the performance of what I own in the space, even considering the macro backdrop. As I joked on social media recently, you didn’t need crypto to score monumental gains over the past 15 months, all you needed was a simple “old world” energy ETF.
“Energy is the only S&P 500 sector with a rally this year, jumping more than 30% while every other group declines,” Bloomberg’s Felice Maranz wrote Thursday, noting that historically speaking, “the sector still has a long way to go before catching up with the broader market.” Kolanovic produced the figure (below) which gives you some context on that point.
That would appear to suggest there’s scope for energy to log crypto-esque gains, but Marko reminded investors that “the convergence can take place with some combination of energy appreciation and a decline of other sectors in case of a continued acute energy crisis.” In other words, the disparity can correct from both sides.
Kolanovic also reiterated that while it’s tempting to point to “recent developments” when ascribing causation for the world’s energy panic, it’s not that simple. What we’re seeing is “just the byproduct and not the cause of the great supply/demand imbalances that developed over the past years due to underinvesting in ‘dirty’ industries and the COVID crisis,” he wrote.
I’ll recycle some language from a previous article that’ll be familiar to regular readers. It’s important, I think, to make one’s own biases clear while endeavoring to remain as objective as possible about what’s actually happening in the world. The following passages (from a December article) articulate my personal view while acknowledging the fact that, at present, reality simply isn’t cooperating.
I am, of course, squarely in the camp that believes the implementation of a Progressive economic agenda is the only way to prevent inequality from spiraling so far out of control in America that the country ends up experiencing acute societal breakdown. Similarly, I think it’s fairly obvious that absent a rapid about-face on energy policy, the biome is doomed.
That said, procrastination has consequences, my unblemished collegiate track record of penning publication-ready papers the night before they were due while finding my way to the bottom of a Hennessy bottle notwithstanding.
Decades of procrastination on climate initiatives likely means the world will experience “significant energy storms [with] prices much higher at times, and prone to turbulence pretty much all of the time,” as SocGen put it. Decades spent pursuing supply-side “reforms” and instituting an unbridled version of capitalism free from common sense guardrails left America to rewrite the rules virtually overnight when the pandemic hit, with predictable results. Haphazard policymaking begets suboptimal outcomes even when (and, in many cases, especially when) the policy shift is well-meaning.
As I wrote in a separate social media post earlier this week, if you can’t be objective, you’ll be able to make some money, but you’ll probably have a difficult time keeping it.
I live by that (among other) mantras, which is why, despite my political leanings, I put substantially all of my speculative budget into oil and gas shares during the second half of 2020.
Although the nominal gain is relatively small (it was, after all, a speculative budget), that investment has logged (by far) the largest percentage gain of any position I hold. Tempted though I was, I didn’t take profits this month.
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