Of all the big banks no one has nailed the reflation and recovery trade as well as JP Morgan. Of course, as we noted last week, they are one of several large banks that have been driving equity prices over the last year so ignore them at your own peril.
JP Morgan is shifting back to a fully bullish posture here. Three weeks ago they shifted to a more cautious position (see here), but have removed the hedges as equity fund flows begin to support the market and fears of fiscal tightening, regulation, and sovereign debt appear overblown.
Based on this change in outlook they are moving back into the recovery trade. They are now net long equities, credit, commodities with a long dollar hedge and a short bond position:
- Fixed income: Take profit on the short position in US 2s, but add a short in 10-year UK.
- Equities: Current regulatory proposals would hurt bank profitability, offsetting the positive impact from reduced credit losses. UK banks will be the most impacted, followed by the Europeans and then the US banks.
- Credit: Close tactical short and resume overweight in US HG bonds.
- FX: We add USD/EUR to our basket of dollar longs.
- Commodities: Stay long on strong manufacturing growth.
Source: JP Morgan
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.