According to JPMorgan Chase & Co. strategist Marko Kolanovic, commodity prices, divergent global central bank policy and the recent selloff in equity markets have created a unique buying opportunity for growth and value stocks.
“Sentiment and positioning is now too bearish,” Kolanovic and Bram Kaplan wrote in a note on Tuesday. They predict a near-term rally is likely, particularly for small-cap, high-beta stocks, and suggest investors are building a “dumbbell portfolio” of growth stocks including tech, biotech and finance. innovation, alongside value stocks like metals and mining.
“This is rarely the case and currently possible due to a specific confluence of macro factors such as the commodity supercycle, divergent monetary policy and a very strong sell off in high beta and growth stocks (domestic and international) in the first quarter,” the strategists wrote in a note to clients. “There are growth stocks that have sold off enough, and there are value stocks that are now also growing.”
On this last point, Kolanovic and Kaplan point to energy, metals and mining as sectors considered value stocks over the past decade, in addition to cheap stocks based on measures such as earnings or book value. These can still be considered value stocks on their fundamentals, but now they can also be considered growth stocks because their “momentum and quality have improved dramatically”.
At the same time, many international and domestic growth stocks have sold off so much in recent months that they are beginning to show value attributes. For example, Chinese tech stocks and ADRs, many of which trade at historically low multiples, rank high on both value and growth factors, according to the bank. As borrowing costs rise in the United States, China is easing monetary policy, which should represent a tailwind, Kolanovic and Kaplan wrote.
Strategists are sticking to a pro-risk stance, which goes against Morgan Stanley’s Michael Wilson, who warned that the S&P 500 appears to be overly optimistic about the economic outlook. JPMorgan’s team disagrees, saying interest rate hikes are “now priced in” and inflation, which has been high for decades, will start to ease.
“The war in Eastern Europe, however, may last longer and its impact on the commodity supercycle will persist for the rest of this year,” Kolanovic and Kaplan added.