JPMorgan Says Bonds to Slump, Fueling a Return to Cyclicals

(Bloomberg) -- A sell-off in bonds amid improving economic fundamentals could bring cyclical stocks back into the spotlight in the second half of 2020, according to strategists at JPMorgan Chase & Co.

The bond market is looking “overbought” even in the context of coronavirus fears, said the analysts, who forecast that a recovery in manufacturing following the U.S.-China tariff truce and a rise in bond yields later this year will fuel gains in the sectors most sensitive to economic growth.

“In the short term, they might remain hostage to coronavirus headlines, but we believe that bond yields will be higher into the second half,” said strategists led by Mislav Matejka.

Last week’s optimism that global growth is strong enough to weather the impact of the coronavirus, combined with positive corporate earnings surprises, spurred a rise in government bond yields and a rally in cyclical shares in the U.S. and Europe. However, the mood darkened on Monday and Treasuries and European bonds advanced as cases of the coronavirus outside of China continued to rise.

European cyclicals outperformed defensives for four months in a row at the end of last year as the risk-on rally and optimism about the U.S.-China trade deal spurred an investor shift toward more volatile stocks. This jubilance came to an abrupt halt in January when concerns about the rapid spread of China’s coronavirus sent market players into bonds and safer equities.

Both the cheaper, so-called value stocks, and cyclical sectors have a strong correlation to the direction of bond yields. Banks are particularly expected to benefit from a rise in yields, according to JPMorgan.

While global equity funds have seen net inflows this year, they are equivalent to less than half of the almost $90 billion that bond funds have received, according to EPFR Global and Bank of America Corp. data. Last year, despite the equity rally, investor preference for bonds was particularly apparent with additions of almost $500 billion whereas equity funds lost about $167 billion.

To contact the reporter on this story: Ksenia Galouchko in London at kgalouchko1@bloomberg.net

To contact the editors responsible for this story: Blaise Robinson at brobinson58@bloomberg.net, Jon Menon, John Viljoen

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