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>EQUITY STRATEGY (JP MORGAN)
Trigger to reduce risk is missing; earnings momentum and quality to re-emerge as drivers of stock selection
On the heels of one of the sharpest market rebounds ever, the widely expected correction could even be seen as healthy. However, we believe the following points still hold:
• Asset Allocation: One should remain OW stocks and be buying the dips. Provided that the macro dataflow does not begin to disappoint again, we believe that the technical headwinds and the profit-taking will be transitory. The more “fundamental” trigger to take some risk off the table, in our view, would be when data confirms economic stabilisation. For example, when or if we get the first few ISM prints above 50, the “2nd derivative” story will be over, as per the table on the right.
• Still underweight bonds and cash: Even though the potential inflation end game is probably overly discounted for now, government bond yields could continue to grind higher, reflecting better data flow momentum, and this should be taken positively by stocks. In addition, just through income generation alone, equities are beating both cash and bonds.
• Sectorwise, Cyclicals have lost a chunk of their performance in the past few days, but this is on the back of a dramatic recent run. We believe there will be one more leg of cyclicals performance and think it would be a mistake to start wholesale rotation into Defensives now.
• At stock level, low-quality names did very well during the rally (broadly defined as the most leveraged, the biggest underperformers, lower ROE and “value” stocks). The fundamental factors, such as earnings momentum, did badly, actually showing an inverse correlation with stocks’ relative performance.
• As volatility edges lower, we believe this will start to change, and we expect investors to become more selective, looking for “higher quality” stocks. In addition, we see earnings momentum becoming an important positive driver of relative stock performance again with the stocks of companies showing upgrades to earnings starting to outperform.
• In the report, we screen for the stocks that have underperformed in the latest rally but have seen outright EPS upgrades or have higher ROE than their peer group.
To see full report: EQUITY STRATEGY
On the heels of one of the sharpest market rebounds ever, the widely expected correction could even be seen as healthy. However, we believe the following points still hold:
• Asset Allocation: One should remain OW stocks and be buying the dips. Provided that the macro dataflow does not begin to disappoint again, we believe that the technical headwinds and the profit-taking will be transitory. The more “fundamental” trigger to take some risk off the table, in our view, would be when data confirms economic stabilisation. For example, when or if we get the first few ISM prints above 50, the “2nd derivative” story will be over, as per the table on the right.
• Still underweight bonds and cash: Even though the potential inflation end game is probably overly discounted for now, government bond yields could continue to grind higher, reflecting better data flow momentum, and this should be taken positively by stocks. In addition, just through income generation alone, equities are beating both cash and bonds.
• Sectorwise, Cyclicals have lost a chunk of their performance in the past few days, but this is on the back of a dramatic recent run. We believe there will be one more leg of cyclicals performance and think it would be a mistake to start wholesale rotation into Defensives now.
• At stock level, low-quality names did very well during the rally (broadly defined as the most leveraged, the biggest underperformers, lower ROE and “value” stocks). The fundamental factors, such as earnings momentum, did badly, actually showing an inverse correlation with stocks’ relative performance.
• As volatility edges lower, we believe this will start to change, and we expect investors to become more selective, looking for “higher quality” stocks. In addition, we see earnings momentum becoming an important positive driver of relative stock performance again with the stocks of companies showing upgrades to earnings starting to outperform.
• In the report, we screen for the stocks that have underperformed in the latest rally but have seen outright EPS upgrades or have higher ROE than their peer group.
To see full report: EQUITY STRATEGY
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