Year end is usually a time when Wall Street strategists, so close to that holiday bonus check they can practically smell it, break out optimstic forecasts for the next year and tell their clients to forget any of the pain experienced in the current year and focus on the coming upside. Not so from JPMorgan, however, whose equity strategist Mislav Matejka has just released a note in which the bank lays out why it is the most bearish on stocks it has been in the past 6 years, and with a call that will make every E-trade baby accustomed to BTFDing shiver in their diapers: "The long period of indiscriminately buying any dip might be coming to an end."
Here is JP Morgan with a very morgue-ish prediction, one that will be largely ignored at a time when the ECB has to unveil not one but two QEs just to keep equities flat.
It was a bumpy ride, but global equities appear on track to post marginally positive returns in ’15, at 2.0% MSCI World TR in USD, beating bonds. Since 2009 lows, MXWO is now up 195% TR, vs bonds at 28%. For ’16, we think that the equities risk-reward will be less attractive than it was in the past few years. We reduce our equities OW in a balanced portfolio to a minimal one, at 5% vs benchmark, the lowest we have had since the current upcycle started. The long period of indiscriminately buying any dip might be coming to an end.
JPM dishes out the pain, saying that "we suspect that on a 12- to 18-month horizon, equities are unlikely to perform particularly well":
- Start of Fed hikes was typically not a problem, but this time around the move is coming rather late in the cycle. Could Fed end up behind the curve?
- On P/Sales metric, equities are trading at the top of the historical range. And this is not on depressed sales; these are also at historical highs.
- US Corporate financing gap has turned negative; this was typically not a good starting point.
- US profit margins are showing increasing evidence of peaking.
- Another consideration is China. We called for near-term stabilization in Chinese activity in September, but the medium-term concerns remain. CNY is back to the highs vs EM FX and credit/GDP ratio is elevated.
The future may not be so bright... but don't sell just yet: wait a few months JPM says.
We do not think that one should sell immediately though. The near-term tactical outlook, for the next 3-6 months, could stay constructive, where the first Fed hike is taken positively, and China is stabilising. We look to use potential strength in 1H as an opportunity to reduce equity exposure further.
The main catalyst for JPM's pessimism: the same one that prompted Tepper to get bearish in August - crosscurrents between central banks, with some tightening while others continue to ease at record levels:
There is a clear divergence in regional cycles evident. US enjoyed seven years of a bull market, and a number of indicators are at peak or close to peaking, such as car sales and profit margins. At the same time, corporate balance sheets are weakening, due to elevated levels of buybacks. We stick to our year-long view of a largely sideways US market from here, but could start to see more clear weakness as the year progresses.
JPM's verdit on the US: "Underweight US in a global portfolio." What about the rest of the world:
Eurozone recovery is still in the early stages, with ECB likely to deliver further support. Our top pick in Eurozone last year was Italy, and we stay with it. Also, we remain OW Germany, and keep our multi-year UW UK stance.
Elsewhere, we remain OW Japan, for now, given continued improvement in corporate profitability and in balance sheets. We worry though that BoJ is becoming somewhat reactive and JPY could start to strengthen as ’16 progresses. Given the poor past performance, EM equities should be doing better, but given incoming Fed hikes and strong USD we advise being Neutral EM vs DM. We would look for the opportunity to add once the initial Fed hikes and any potential further CNY devaluation are behind us.
JPM's conclusion: buy winners, sell losers.
We stay with a number of thematic baskets that we advocated for '15: OW Eurozone recovery basket and Eurozone exporters, OW UK domestic basket, OW buybacks basket. We keep our preference for Winners over Losers from low commodity prices. We sell the basket of UK stocks which could suffer due to EU referendum volatility. Rising yields: Buy Winners basket - and Sell Losers basket. We have a basket to hedge against the next potential Chinese devaluation. Value could finally start performing better vs Growth as Fed hikes, short yields and breakevens move up, even in a down market.
Which is bad news for "active" money managers: if indeed BTFD is finished, an entire generation of traders will have no choice but to learn fundamentals and trade based on such old school drivers as financials, revenues, cash flows, balance sheets, and other unpleasantries which the Fed's 7 year intervention in capital markets relegated to an exhibit in the Museum of not so Modern Financial Art.