Over the weekend, strategists at JPMorgan Chase & Co. (NYSE:JPM) concluded that most risk assets including stocks and credit have marked their low points in this Virus War frame that has 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 wrote in a note.
Coronavirus infection rates remain a “wild card,” as they remain high even if they are “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,”
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 Q-2 of this year, JPM recommends that investors average into oversold markets, particularly those where central banks are buying directly.
“The optimal time to re-enter cheap markets is either 1 quarter before the growth slump fades, for those who have high confidence in their business-cycle forecasts; or when valuations reach 2-sigma extremes, for those who are agnostic on fundamental catalysts.”
Either Top-down framework implies starting to re-enter markets now.”
JPM 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.
Have a healthy day, stay home!