(Bloomberg) -- Investors should be more selective in the next six months as asset returns are likely to diverge because liquidity “cannot paper over specific weaknesses indefinitely,” according to JPMorgan Chase & Co.
An “indiscriminate approach” to a portfolio would largely have worked in April and May, when most financial assets rallied -- a typical result at a turning point in the cycle, according to strategists led by John Normand in a June 19 note. They cited extreme positioning and liquidity dynamics, plus central-bank asset purchases, as contributing to increased correlations when economies enter recessions and then move to expansions.
“But typically these high correlations mean-revert to their long-term averages within a few months, in part because the pace of quantitative easing slows and in turn allows country, sector and company-specific factors to reassert themselves,” the strategists wrote. The second half of 2020 “should bring this sort of differentiation.”
JPMorgan’s recommendations for the second half of 2020 include:
- In bonds, take duration risk only in countries with positive inflation-adjusted yields and limited concerns about debt sustainability
- Favor high-grade credit over high yield on default-rate concerns
- Pick developed over emerging-market corporate debt; many EMs outside north Asia face bigger challenges managing public-health and debt sustainability issues
- In stocks, choose Covid-19 “endgame winners” such as technology, communications and health care, as opposed to a broad preference for cyclicals or defensive shares
- Sell the U.S. dollar versus G-10 currencies with strong current-account positions like the Swedish krona or Japanese yen, and EM currencies with high real yields like the Mexican peso, Russian ruble and Indonesian rupiah
- Stick with gold among commodities as it’s most leveraged to a low real-yield environment, and to agriculture, the cheapest market
©2020 Bloomberg L.P.
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