“We examine sector and style preferences regarding the shape of the yield curve. The current phase is likely to be described as an upward slope, with a falling long-term yields, but also an even faster downward movement of short-term yields,” explain the experts of the American banking giant.
Similarly, these analysts highlight that “stocks with higher beta tended to be the most rewarded during the downward slope of the curve, while defensive stocks tended to do well during the upward flattening of the curve.”
In this sense, JPMorgan points out that the bullish trend could lead to “a good result” for cyclical stocks, especially when the Federal Reserve (Fed) begins to cut interest rates; in this regard, everything seems to indicate that the first drop will come on September 18 and will be 25 basis points. However, these experts emphasize that the ‘crux of the matter is in “the context of activity, since, in particular, the yield curve has always steepened before past recessions.”
“The last eight times the Fed initiated easing, half were followed by a soft landing and half by a recession. Our main forecast remains that the bond yields continue to falland the CESI indices (whether the economy is performing better or worse than expected) remain negative in the US, Europe and China,” these strategists point out.
Consequently, they add, the defensive sectors are among the most profitable in the US and Europe over the past six months. “They could continue to do so, given lower bond yields and weaker activity momentum. Many cyclical sectors have performed poorly, especially commodities and consumer products.but going long in these sectors typically requires a steeper curve, and that with an increase in 10-year profitability. We remain skeptical about the market in general“, they warn.
Investments in the USA: in which sectors it is best to position yourself
JPMorgan maintains overweight “Key” defensive sectors such as healthcare, utilities, real estate, telecommunications and basic goods and remains awaiting better results.
Why small caps can be a good opportunity?
JPMorgan also notes in its report that interest rate cuts should bring about “a change of fortune” for small caps or ‘small caps’, while showing their “discomfort” with “the strength of economic activity.”
“Small caps have been underperforming for a long time, They are cheap and the risk of concentration remains in the mega-caps. It is encouraging that since June, small-cap companies in several regions have started to outperform,” the strategists said.
On the other hand, the American firm highlights that Value investing has historically performed well when yields and activity have moved higherIn this case, JPMorgan points out that the factors are “contradictory”: on the one hand, growth is traded at a premium and concentration risk is high, but yields are also likely to fall and activity is mixed, which would lead to continued payment of the premium for growth.
“Given the strong growth trend, we have moved our previous view of ‘overweight’ growth over value to ‘neutral’ in the summer, but we have not reversed it. To buy value stocks directly, earnings per share of growth stocks would need to start to decline versus value stocks and bond yields rising for the right reasons, which is not the case at the moment,” they said.
Source: Ambito
