For the past three months, JPMorgan's head quant Marko Kolanovic has been on a crusade to convince markets that the impact of the delta variant has been drastically overblown (see June 30: "JPM's Kolanovic: The Delta Variant Does Not Pose A Risk For Markets", July 19 "JPM's Kolanovic: Stop Freaking Out About The Delta Case Spike" and August 12 "JPMorgan Says Delta Cases About To Turn Lower As Kolanovic Calls The Bottom For Yields And Cyclicals"). And while he may have been early, he was eventually right, and as we noted recently new US cases, mostly of the delta variant, have turned decisively lower.
As such, it will not come as much of a surprise that in his latest note, Kolanovic - who has been one of the most steadfast bulls on Wall Street in recent years - picks up where he left off, and writes that he retains "a pro-risk allocation on strong global growth as the world continues to recover from the pandemic, accommodative policy, and continuing earnings surprises."
While reopening of the global economy was delayed by the delta variant wave, it was not derailed in Kolanovic's view. As for the delta wave which caused so much consternation - arguably as a result of relentless media scare propaganda - the JPM quant writes that it has "likely peaked and is receding in the US and globally, given Rt is falling and below one in ~90% of US states, infections are dropping in 40 states and global cases are falling for the past 2 weeks allowing the pandemic recovery to resume."
As delta subsides further - unless of course it is replaced by the "far scarier" mu variant, whose ascent will be used to meet a specific political agenda - and as inflation persists due to supply frictions from reopening and accomodative monetary policy, JPMorgan expects "the reflation/reopening trade to resume its outperformance and believe that bond yields and cyclicals likely bottomed early last month", an identical call he made one month ago when Kolanovic also said the bottom for yields and cyclicals is in.
We believe cyclicals have bottomed for the year and would be cautious on COVID lockdown beneficiaries and bond proxies. Given our assumption of higher bond yields, we recommend reducing equity duration by reducing Tech and increasing cyclicals.
In other words, it is Kolanovic's view that investors should cut exposure to the widely outperforming tech sector, while raising stakes in economically sensitive companies like energy - something they clearly did today.
His bigger picture view is hardly surprising - it is the same one he has pitched for much of the past years, BTFD and if there is not D just B.
In Equities, we stay bullish as the risks are well-flagged and in some cases overdone, with signs that the Delta variant wave is rolling over and that the China slowdown can be countered with a timely policy pivot. We believe cyclicals have bottomed for the year and would be cautious on COVID lockdown beneficiaries and bond proxies. Given our assumption of higher bond yields, we recommend reducing equity duration by reducing Tech and increasing cyclicals.
While it remains to be seen if Kolanovic's repeated attempts to time the market's inflation point will be correct this time, at least one market segment - hedge funds - seem to completely disagree with a key part of the Croat's call: after 28 straight weeks - the longest stretch since the global financial crisis - hedge funds are no longer net short the Nasdaq.
As Bloomberg wrote earlier today, "the streak broke last week as the 100-member index clocked its 40th record for the year. Hedge funds’ push to buy about 7,000 futures contracts was nothing to write home about, but it tipped the positioning scale to net long for the first time since late February."
Kolanovic also advised adding to stocks in Japan and emerging markets, saying he has "preference for cyclicals/value via an OW in EM, Japan and Europe vs. the US, and we increase our OWs in EM and Japan this month given their recent underperformance and an anticipated boost in Japan from a political regime change." I.e., hopes that the transition of PM Suga will lead to another fiscal (or monetary) bomb in Japan which will lead to a continued surge in Japanese stocks.