“Sentiment and positioning are now too bearish, in our view,” JPMorgan’s Marko Kolanovic said Tuesday, in a note underscoring the bank’s still constructive outlook on equities.
Last week, I suggested mainstream media outlets, including CNBC and Bloomberg, inadvertently misconstrued a very small reduction in JPMorgan’s equity allocation.
Specifically, media headlines trumpeted a single sentence from the bank’s weekly “JPMorgan View” piece, which is really just a compendium of cross-asset research. “JPMorgan’s trading guru Kolanovic says take profits now on US stocks,” CNBC declared.
Context was key. JPMorgan’s equity allocation was +14, the highest OW ever. The reduction touted by media outlets took that allocation “all the way down” (the scare quotes denote sarcasm) to +12, the second highest OW ever.
In short: It wasn’t bearish, and Kolanovic made that explicit on Tuesday. “While we slightly reduced our record equity allocation, we remain constructive on equities and think that a near-term rally is likely, particularly in small-cap and high-beta market segments,” he said.
To be sure, some of the fear pervading markets is understandable. “A lot has been going on,” Marko wrote, noting that “aggressive” Fed chatter is “scaring investors,” as are surging commodity prices, war and the stop-start nature of COVID re-openings around the world.
Given that, “one should not be entirely surprised that… investor sentiment [is at] 30-year lows and positioning is estimated to be in the ~10th percentile for systematic and ~20th percentile for discretionary investors,” he wrote, before noting that receding volatility may be helping to put a floor under stocks, with systematic strats buying an estimated $2 billion per day.
He cited tax day for some recent selling. That seasonality is observable, he said. The figure (below) suggests that all else equal, stocks could bounce in the back half of this month.
The second half of April “is also the second strongest two-week performance period of the year,” Kolanovic remarked.
Let’s say you’re inclined to be constructive. What would you buy? Well, Kolanovic said you want to try to get the best of both worlds, where that means “stocks that have both growth and value attributes.”
When it comes to value, he likes energy, metals and mining, which he conceded were “value traps” over the last 10 years. Currently, they still count as value — they rank as cheap across a variety of metrics. But they’re growth stocks now too, and their balance sheets are improving, not to mention recent outperformance means they screen well on momentum.
On the growth side, Marko said some international shares have probably sold off enough to warrant investor attention. He mentioned Chinese ADRs, which he noted “trade at all-time low multiples and hence rank highly on both value and growth factors.” Of course, there’s a reason why China’s largest tech companies (for example) are cheap — the regulatory overhang is oppressive. However, the vagaries of Party politics aside, there is a price at which they’re attractive. It’s just a matter of figuring out what that price is.
Kolanovic’s main point, though, was that a confluence of factors affords investors an exceedingly rare opportunity. “One can construct a ‘barbell portfolio’ of traditional growth (e.g., tech, biotech, innovation) and traditional value stocks (e.g., metals, mining) that currently have favorable attributes across most traditional factors,” he said.
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