Evening Brief – 06.12.23
Despite well-telegraphed geopolitical and economic risks, JP Morgan strategists see the potential for high-single-digit equity returns over the next 12 months.
In the recently released JP Morgan Private Bank 2023 Mid-Year Outlook, “The Recession Obsession, strategists highlighted five key areas to guide investors through the current environment, including reallocating cash; emergence of European and Chinese stocks; reducing concentrated positions; investing in bonds; and understanding risks and opportunities in regional banks and commercial real estate.
“Markets are indicating the lows of October 2022 are behind us, and we think diversified portfolios can continue to generate higher returns than either cash or inflation into 2024,” noted Clay Erwin, Global Head of Investments Sales & Trading at JP Morgan.”
According to the report, corporate profit growth appears to be better than people believe – sales are holding up, transportation and energy costs are lower, the dollar is weaker, and the labor market is stable. These variables are leading to an increase in analysts’ earnings expectations and providing important entry points for investors. The report indicated that many sectors have already been in recession, including technology, semiconductors and homebuilders, and the price declines now offer an opportunity to reinvest cash.
The bank also highlights opportunities in European and Chinese stock markets. Nearly two-thirds of its US clients have no exposure to China and half are “materially” underweight European stocks relative to developed benchmarks. “Underweights in either could now act as a drag on your portfolio,” said Grace Peters, Head of EMEA Investment Strategy at JP Morgan.
The report also noted the recent narrowing breadth in the stock market, with the bulk of gains attributed to a few select stocks.
“Recent stock market volatility, capped off by regional bank failures, has made holding a concentrated position in a single stock or security a particularly pressing risk,” the report said, adding that different strategies must be used.
The strategists discussed their preference for bonds for protection and returns as interest rates have steadily climbed.
“J.P. Morgan clients’ allocations to cash in investment accounts, certificates of deposit, and short-term fixed income – securities maturing in less than a year – have risen by almost $120 billion over the last 12 months,” the report noted.
“This made sense during the fastest hiking cycle in 40 years, but we believe the cycle is complete,” added Thomas Kennedy, Chief Investment Strategist.
The report identified two risks to the economy that could cause strain in regional banks and commercial real estate, both due to rising interest rates.
“Within commercial real estate, we are most negative on office buildings. U.S. regional banks look especially vulnerable with higher exposure to commercial real estate than large banks,” said Chris Baggini, Global Head of Equity Strategy. The bank sees opportunities by extending credit to high-quality borrowers and buying distressed assets at discounted values.