JP Morgan: Excess sell-off – Shares have already appreciated the risks, little impact from a conflict in Ukraine

Of Eleftheria Kourtali

The sell-off we saw was excessive, JP Morgan points out in a new report, with the stock market not only being in a correction phase, but already being in a bear market, without this being justified by the fundamental figures.

The US bank continues to expect strong economic recovery this year as COVID-related constraints and distortions diminish, leading to increased mobility and liberalizing consumer and corporate demand.

People are on the verge of a full re-opening, with cases receding and many policymakers signaling easing restrictions. Markets have been volatile and the climate is negative as investors struggle with monetary policy normalization and geopolitical risks.

However, JP Morgan believes that trisk assets have largely adapted to monetary policy changes, markets have appreciated an excessive tightening in relation to the interest rate hikes we will eventually see from central banks this year, and a policy shift in China could offset much of the tightening impact on developed markets.

Although the risk of conflict in Ukraine is high, would have a limited impact on global stock markets and would likely trigger a mild reassessment of the situation by central banks, such as an estimate. At the same time, as she states, according to a poll she conducted on her clients, though 83% believe that a military conflict in Ukraine would cause a sell-off in global stock markets, however, the majority expect the impact to be modest and to be exceeded.

In favor of risk – the favorite trades

JP Morgan expects that risk assets such as stocks recover as they absorb these risks and the climate improves, with the support of inflows from investors and buybacks in which many listed companies will proceed. It therefore maintains a risk-taking stance in its portfolio, with a strong preference for circular stocks and sectors, with an aggressive overweight on stocks in general as well as commodities, which is “financed” by the large underweight that now holds bonds.

The American bank continues to prefers “value” stocks as well as cyclical stocks as well as higher beta stocks, given their still cheap valuation and still limited placements in them by investors, as they are the beneficiaries of rising bond yields and higher commodity prices. It also maintains large overweight on goods, as mentioned above, focusing on Energy, given the asymmetry of geopolitical risks. For example, The de-escalation in Ukraine would probably only cause a modest drop in oil, while an interruption in the flow of oil could easily push prices above $ 120 a barrel.

In terms of its geographical preference, remains overweight in Emerging Markets, China, UK and Eurozonewhile also remaining bullish on banks, especially in these areas.

If the geopolitical scenario allows it, the Eurozone is very attractive compared to the US. For the Eurozone, the main aid weapons are: 1) growth convergence – 2022 is projected to be the first year since 2017 in which Eurozone GDP will be better than the US, 2) interest rate sensitivity – bond yields and real interest rates are likely to continue to move higher, leading to outperforming cyclical markets such as the Eurozone, 3) emerging markets and China – China’s growth momentum has left the worst behind and the Eurozone is a regional play for the region, and 4) attractive valuations and relatively low investor positions.

Shares have the “weapons” to deal with risks

Although central bank aggression has increased, with market interest rate bets sometimes excessive, the key to the recent sell-off is that stocks are better equipped to handle whoever risks. The negative climate seems excessive as the conditions for a recession in the economy are not met, while although inflation has “burdened” the investment strategy, in the end the consumption front is strong given the strong labor market.

Therefore, as JP Morgan points out, the sell-off we saw was excessive. The stock market is not only in correction, but is already in bear market without showing a recession on the horizon. In terms of valuation, the re-rating of the S&P 500 has been almost completely erased with the P / E being just 0.5 times higher than the pre-pandemic level, when the fundamentals are less supportive. In general, The investment climate is already extremely bearish, he points out, with the Put / Call index reaching its highest level since March 2020.. The shares, as the American bank underlines, still offer significant growth margins and the current upward cycle is far from over.