by Marko Kolanovic, Equity Strategist, J.P. Morgan
Cross-Asset Strategy: We maintain our pro-risk view given the ongoing recovery from the pandemic, accommodative monetary policy, and still moderate positioning in risky asset classes. We look for global GDP to surge in 2H as the laggards join in a more synchronized growth boom, as widespread vaccination allows for a sustained rise in mobility and economic activity. We view the recent reversal of the reopening/reflation trade as driven by a combination of technicals (i.e., position unwinds and systematic strategy flows in an environment of low liquidity) and overblown fears around the Delta variantâs impact on growth and mobility (see here). In our view it is far too early to fade reopening/reflation trends, as we are in the early stages of the post-pandemic recovery (the world hasnât reopened yet) not late-cycle, and inflation is likely to continue to realize above market expectations. The pullback thus creates a strong opportunity for investors to position for the outperformance of cyclical and value assets over bonds, defensives and growth. As such, we retain large OWs in equities (tilted towards value and cyclicals) and commodities, funded by a large UW in government bonds.
JPM Clientsâ View: Click here to take this weekâs survey. In addition to our running questions on equity sentiment and near-term portfolio changes, this week we poll investors on their perceptions around the recent reversal of the reopening trade and bond rally. Last weekâs survey results indicated: (1) equity exposure/sentiment among respondents is ~62nd percentile on average; (2) 57% planned to increase equity exposure, and 89% to decrease bond duration nearterm; (3) the median respondent expected US infrastructure bill(s) worth $1-1.5Tr to be passed this year, funded by a hike in both the corporate tax rate to 25% and top individual income tax rate.
Who caused the bond rally? Momentum traders such as CTAs, retail investors and pension funds have likely been behind the recent bond rally, rather than tactical institutional bond investors, in our view. The decline in bond yields in recent weeks does not signal a change in the medium-term fundamental picture, which in our mind is a picture of strong growth, continued inflation surprises and of a shift to central bank tapering towards the end of the year.
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