JPMorgan’s Kolanovic Defends Value After Worst Month in 20 Years

(Bloomberg) -- Investors who sold less expensive, economically sensitive stocks amid resurgent Covid fears are misjudging the risk, according to JPMorgan Chase & Co. chief global markets strategist Marko Kolanovic.

Value and cyclical shares have come under pressure as the spread of the Delta variant added to concern over the economic outlook at a time when the Federal Reserve showed a hawkish shift in monetary policy.

After a brief uptick mid-month, yields on long-dated Treasuries have retreated, helping ease pressure on richly-valued equities such as technology, while energy and financial stocks surrendered their 2021 leadership. The Russell 1000 Value Index has trailed its growth counterpart by roughly 8 percentage points this month, the most since 2000.

To Kolanovic, worries over the threat of a new wave of Covid outbreaks are misplaced. After looking at the progression of cases and fatalities in the top 15 countries most affected by the Delta variant over the past month, he noted that vaccinations appeared to be curbing the severity of outcomes, a sign of an improvement in the overall Covid situation.

The “current market positioning is not justified,” Kolanovic said in a note to clients, adding that it will lead to “a move higher in bond yields, value and cyclical stocks.”

Kolanovic has been a steadfast bull on value shares in recent years. Last month, he warned that money managers who've spent the bulk of their careers profiting from deflationary trends need to quickly switch gears or risk an “inflation shock” to their portfolios.

The latest retreat in the so-called reflation trade, exemplified by cyclical and value stocks, reminded Kolanovic of a similar episode in February, when another variant, known as B.1.1.7, triggered a risk-off move.

“When the market properly assessed the risk of B.1.1.7, yields and value staged a strong rally from mid-February to mid-March, while growth stocks (often perceived as beneficiaries of lockdowns) sold off,” he said. “There is a similar setup now with the so-called Delta Covid-19 variant fears.