JPMorgan’s Kolanovic Dials Back Bullish Stance on Equities

(Bloomberg) -- Investors should start trimming equity holdings following the recent rally as tensions heat up between the U.S. and China, according to JPMorgan Chase & Co.’s strategist Marko Kolanovic.

“We are dialing down our positive outlook on equities and would like to see these political risks show signs of normalization,” Kolanovic wrote in a note to clients. While he predicts that tensions over China’s role in the coronavirus pandemic will eventually ease, he sees stock-market damage in the meantime.

Kolanovic urged investors to buy the dip in early March amid the fastest bear-market decline on record. While that call came a bit before that month’s trough, he kept his bullish stance since, saying last month that the S&P 500 can reclaim its all-time high in the first half of 2021. The gauge, now up 35% from its 2020 bottom, is poised for a third weekly gain in four and just broke out of a monthlong trading range, closing at the highest since early March on Wednesday.

But Thursday gave investors a taste of what could be coming amid an escalation in political tensions between the U.S. and China. American stocks erased gains and ended lower after President Donald Trump said he’d hold a press conference on China Friday, spurring concern that Sino-American tensions could disrupt the economic rebound narrative that’s been propelling markets.

To Kolanovic, the latest spat between Washington and Beijing is a sign of politicization of the Covid-19 epidemic, a move that not only delays economic reopenings but also threatens to cripple the recovery of global trade.

“Reopening only half of the economy will not be sufficient to support our current forecast for all-time highs in 2021,” the strategist wrote. “On the other side, a complete breakdown of supply chains and international trade, primarily between the two largest economies (U.S. and China), would justify equities trading drastically lower.”

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