Quant Kolanovic Sees ‘Extraordinary Opportunity’ in Value Shares
Quant Kolanovic Sees ‘Extraordinary Opportunity’ in Value Shares
(Bloomberg) -- There’s an “extraordinary opportunity” to buy under-owned and heavily-shorted value and cyclical stocks into 2020, according to JPMorgan Chase & Co.’s Marko Kolanovic.
Investors should switch from overcrowded positions in defensive, low-volatility and momentum shares into this year’s laggards as global economic indicators recover and the trade war starts to abate, the quantitative strategist wrote in his annual outlook note Monday.
“While the rotation toward value started in September, we think it is still in its early stages and hence expect the enormously crowded low-volatility trade to unwind over the next six months,” he wrote. “Our highest conviction ideas are deep cyclical segments such as energy equities and credit that could stage an outsized rebound in 2020.”
While global equities shrugged off U.S.-China trade tensions this year to register strong gains, investors showed a clear preference for growth stocks over their cheaper value counterparts. The MSCI World Growth Index is up 28% year-to-date, almost double the 15% rise in the MSCI Value Index.
Kolanovic has been flagging the opportunity posed by value stocks for months now, noting in May that the gap between defensive and cyclical factors as well as quality and low-volatility had reached all-time highs, and in July saying that the “unprecedented divergence between various market segments offers a once-in-a-decade opportunity to position for convergence.”
This year’s monetary easing measures will spur a cyclical upswing in 2020, according to Kolanovic. He sees fiscal stimulus and a Federal Reserve holding off on interest-rate hikes helping steepen the yield curve and drive the outperformance of cyclical, value, emerging market and international equities.
Expected outflows from bonds into equity funds will also support stock markets, he added.
Volatility Outlook
The quantitative strategist expects a similar path for U.S. equity volatility next year as seen this year, and calculates a fair value for the Cboe Volatility Index, or VIX, at around 15. A reading of around 12 will be most prevalent next year, though there will likely be one or two spikes into the 15-25 range, he said. The gauge closed at 15.86 on Monday.
“As such, we think that the outlook for short-volatility strategies is only marginally better than last year,” he said.
An escalation of the trade war is the main risk to the strategist’s outlook, though Kolanovic sees this as unlikely, with the U.S. presidential election approaching.
“Taking into account our macro outlook and levels of positioning, we think that equities can still move higher,” he said.
To contact the reporter on this story: Cormac Mullen in Tokyo at cmullen9@bloomberg.net
To contact the editors responsible for this story: Christopher Anstey at canstey@bloomberg.net, Joanna Ossinger
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