Most risk assets should trade higher in the second quarter of the year, Normand said. He recommends that investors average into oversold markets, particularly those where central banks are buying directly. (Averaging into markets
entails spreading out the purchases over time rather than diving in in one go.)
Not everyone sees the bottom as necessarily in.
Group’s David Kostin reiterated in a note on Friday that he expects the market to turn lower in coming weeks. He cited a checklist for a sustained rally similar to Normand’s — of slowing viral spread, evidence that fiscal and monetary policy stimulus is working, and a bottoming in investor positioning and flows.
Gavekal Research’s Anatole Kaletsky said in a note Monday that it’s too early to buy equities, citing reasons including “surprisingly complacent” investor sentiment and historical data showing bear markets almost never end on a single massive sell-off without retesting the bottom.
Off the low
The MSCI All Country World Index tumbled some 34 per cent from its February record high to its recent low on March 23. As of early London trading Monday, it had recouped more than quarter of that loss.
Normand said his approach dovetails with the recommendations in the past week from bottom-up analysts at JPMorgan
to add exposure in US and European credit, peripheral European sovereigns, and US and European inflation breakevens.
On the stocks side, things are somewhat more nuanced. JPMorgan’s multi-asset portfolio has been overweight equities all year, though partially hedged with short positions in credit and long ones in the US dollar. “Thus, future adjustments would be in terms of magnitude and funding source rather than in overall tilt,” Normand said. He added that the firm’s global equity strategists “believe that the risk-reward for equities remains skewed to the downside.”
Normand cautions that not all apparently cheap markets should be bought, as there is still a risk-reward spectrum. Developed-market bonds should be used to fund allocations to cheap credit and equities, but bond sell-offs should also be used as opportunities to buy duration as insurance against the next shock.