JPMorgan Says Investors Should Get More Selective in Second Half
Workers erect a construction barrier in front of JPMorgan Chase & Co. headquarters in New York, U.S. (Photographer: Michael Nagle/Bloomberg)

JPMorgan Says Investors Should Get More Selective in Second Half

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 Says Investors Should Get More Selective in Second Half

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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