Love ’em or hate ’em few have ridden the recovery rally as well as JP Morgan’s equity team. They continue to trade the rally from the bullish side (and the correct side). They say the strength of the recovery is underestimated and skeptical investors will slowly continue to pile into risk assets. Of course, they aren’t the only big bank with a very positive outlook. BlackRock recently released very similar commentary.
Just a few weeks ago JP Morgan said the concerns about China’s tightening and Greece’s debt fears were overblown and investors should buy the dip (see here for more). But this doesn’t mean there aren’t continuing risks to their outlook. Among the main risks are the following:
- Premature policy tightening
- Unfinished delevering.
In terms of strategy, they are getting more and more aggressive. They like Greek government debt, US small caps and a tactical long in oil:
- Fixed income: Close shorts in US 2s, but stay short in the UK. Buy Greek government debt.
- Equities: Stay long, focused on small caps and cyclical sectors. We are reluctant to overweight EM equities despite their higher beta.
In order of importance, we like most equities (small caps and cyclicals), then higher-yielding credits, followed by commodities (base metals), and rounded off with a small long in US HG. This strategy is not mega bearishbonds, where we trade tactically from the short side.
- Credit: Investors are becoming more bullish US HG spreads but have yet to adjust their positions. Stay long US HG.
- FX: Take profit on long USD positions against EUR, GBP, and commodity currencies.
- Commodities: Stay long commodities, favoring base and precious metals near term. They have a $90 year-end target on oil
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.