JPMorgan remains bullish on stocks, but it also suggests investors take some profits.
“We retain a pro-risk view and continue to recommend overweights in equities and commodities and underweights in bonds,” JPMorgan strategists led by Marko Kolanovic wrote in a commentary.
“Prior to the Ukraine war, growth was expected to accelerate to well above trend, as we reopen from the omicron wave and see an unleashing of pent-up consumer and corporate demand,” they said.
“Although growth prospects have been downgraded over the past month, much of this impulse remains, and we still see supports from strong labor markets, light investor positioning, healthy consumer and corporate balance sheets, easing policy in China, and fiscal supports in several countries to offset part of the drag from high energy prices.”
But stocks already have recovered a majority of their early March drops. So they “no longer look oversold,” the strategists said.
Meanwhile, “risks remain elevated around geopolitics, policy tightening and growth,” they said. “As such, we take profit on the tactical increase to our equity overweight initiated last month.”
Emerging Markets Over Developed Markets
Looking at individual countries, while the Federal Reserve is tightening monetary policy aggressively, China is expected to ease monetary policy as soon as April. So the strategists are increasing their overweight position in emerging-market stocks versus developed-market stocks.
“We also maintain our large strategic overweights of commodities and energy stocks given structural supply/demand drivers and geopolitical risks,” they said.
Despite their profit-taking recommendation, the strategists are keeping a large equity overweight versus bonds. “If bond-yield rises continue, they could eventually become a problem for equities,” JPMorgan said.
“But we believe current real bond yields at around zero are not high enough to materially challenge equities. Given low bond positioning, a further big rise in real yields from here seems less likely.”
30% to 40% Rise in Commodities
As for commodities, The S&P GSCI Index of commodity prices has jumped 25% year to date. And J.P Morgan strategists said last week that commodity prices have the potential for substantial further gains from here.
“In the current juncture where the need for inflation hedges is more elevated, it is conceivable to see longer-term commodity allocations eventually rising above 1% of total financial assets globally, surpassing the previous highs seen during 2008 or 2011,” the strategists wrote in a commentary.
And what does that mean for commodity prices? Such a development “would imply another 30% to 40% upside for commodities from here,” the strategists said.
