JPMorgan Drops Cautious Stance, Urging Buy the Dip in Stocks

(Bloomberg) -- Investors should buy the dip in equities because government and central bank policies will counter the economic blow of the spreading coronavirus, according to JPMorgan Chase & Co. strategists who had previously been telling clients to trim risky bets.

The outbreak and its economic implications are “the main source of risk, but the market has significantly repriced this risk over the past couple of weeks,” strategists including Marko Kolanovic and Nikolaos Panigirtzoglou wrote in a note to clients. “We expect the impact of COVID-19 to be temporary and mitigated by broad policy stimulus, even as the virus spread is proving more severe than anticipated.”

The team urged investors to boost equity holdings to 6% above what's suggested by multi-asset benchmarks. That's up from the 5% overweight recommended a month ago. They should reduce exposure to corporate bonds, maintaining an underweight position in fixed income while staying bullish on commodities.

“We had been trimming risk from our model portfolio the past couple of months given the strong market rally and uncertainty around this epidemic,” the strategists wrote. “But we now see the risk/reward as increasingly skewed to the upside for risky assets and use the current pullback to add back to cyclical exposures at the margin.”

Stocks have tumbled around the world this year as the rapid spread of the coronavirus threatened to send the global economy into its weakest expansion since the 2009 recession. Oil has led a plunge in commodities while demand for safety drove bond yields to record lows.

Despite threat of the virus, JPMorgan strategists expect all the support from governments and central banks to right the ship later in the year. In the U.S., the Federal Reserve just delivered its biggest cut to interest rates since 2008 and the House passed a $7.8 billion emergency-spending bill to fund a response to the outbreak.

Read more: Gundlach Says Fed Likely to Again Cut Rates 50 Basis Points (1)

“Our economists marked down growth expectations for the quarter globally on the back of the virus, but look for a strong rebound in activity once the epidemic abates,” the strategists wrote. “The broad risk-off sentiment last week also triggered sharp de-leveraging by systematic investors, such that positioning from these investors has turned into a tailwind for the market.”

In a note earlier this week, Kolanovic suggested that computer-driven traders and options hedgers that drove the latest U.S. equity sell-offs are likely to turn into buyers. Specifically, trend-following traders, such as commodity trading advisers, and volatility targeting funds now hold below-average exposure to equities, making them susceptible to upside shocks.

The S&P 500 fell 4% as of 3:15 p.m. in New York. Even after two 4% rallies this week, it's down more than 11% from its Feb. 19 record.

To contact the reporter on this story: Lu Wang in New York at lwang8@bloomberg.net

To contact the editors responsible for this story: Courtney Dentch at cdentch1@bloomberg.net, Chris Nagi

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