“We believe rates market repricing went too far and the Fed will surprise dovishly relative to what is now priced into the curve,” JPMorgan analysts led by Marko Kolanovic wrote Monday, in an asset allocation update.
The bank made no major changes to its model portfolio, where overweights in equities and commodities are funded by underweights in bonds and cash. Later, the bank’s Michael Feroli adopted a 75bps rate hike from the Fed as his base case for this week’s meeting. He cited, among other things, the Wall Street Journal‘s Monday afternoon article which triggered an acute reaction in rates.
Although the bank doesn’t advocate “indiscriminate” stock-buying, Kolanovic stuck to his contention that markets will end 2022 more or less flat after recovering losses in the back-half of the year. Markets, he said, have priced in “more than enough recession risk,” and in the view of the bank’s cross-asset strategists, a recession will “ultimately be avoided,” at least in the near-term, “thanks to consumer strength, COVID reopening and policy stimulus in China.”
Equity exposure/sentiment among clients was ~48th%ile in the latest weekly survey. 64% planned to increase their equity exposure in the near-term (figures below).
Risk assets began the week squarely on the back foot as concerns over the scope of Fed tightening to control inflation contributed to another large rates tantrum, which undermined equities in a continuation of 2022’s “diversification desperation” theme. The S&P fell into a bear market, and at least one analyst assigned 10% odds to a 100bps Fed hike.
For JPMorgan, equities can find support from light investor positioning, depressed sentiment and the corporate bid.
Kolanovic recapped the bank’s favorable outlook for commodities “both at an asset class level and in equity sectors and currencies.” JPMorgan began calling for a commodities supercycle early last year, when Kolanovic cautioned on the potential for a “full-blown energy crisis.” That warning was borne out in September and October, and went on to become the defining feature of the macro universe starting in late February, when Russia invaded Ukraine.
Raw materials have been a one-way trade (figure above).
On Monday, JPMorgan reiterated that commodities can hedge inflation and geopolitical risks. That’s certainly been the case over the last several months. Commodities stand alone as the best performing asset class in an otherwise bleak 2022.
The bank is underweight credit versus equities, in consideration of credit’s “greater vulnerability” to rising rates and the impact of Fed balance sheet runoff. Within equities, Kolanovic is an advocate of beaten down segments that trade at historic lows on a relative valuation basis, including select Chinese shares and small caps. JPMorgan is underweight some “crowded” and “expensive” defensives.
In rates, the bank favors flatteners, and in FX, the dollar, “given fragmentation risks in the euro area and a dormant BoJ.”
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