On Monday last week, two big pharmaceutical companies Pfizer and BioNTech from the US and Germany respectively announced that the COVID-19 vaccine they have been collaboratively working on for months presented 90% effectiveness in preventing COVID-19, results coming from over 43,500 people tested from six countries.
This announcement sparked a surge in stock markets around the world with the Dow, S&P 500 in the US, the Tokyo Nikkei in Japan, and the FTSE 100 Index in the UK among others all registering gains on Monday last week and stayed trading positively after Pfizer’s COVID-19 vaccine announcement.
The vaccine presented the good news of better performance of economies around the world, so investors dived into stocks they expect to pick up pace both in the near and long-term as the economy recovers.
With the stock market being optimistic and investors in the mood to make a killing off it, Marko Kolanovic, the Head of Macro Quantitative and Derivatives Strategy at JPMorgan recommends five strategies for benefiting further from the market rotation.
“The vaccine news is a game-changer but those who missed out on [last] week’s biggest rallies still have the chance to benefit. With volatility plummeting from recent highs and investors’ risk appetites improving, several long plays stand to outperform as the US comes closer to distributing a vaccine,” Kolanovic said in a note to clients on Thursday, November 12, 2020.
Here are the five strategies Kolanovic laid out to clients:
Pushing further into stocks
Kolanovic says that a divided government, the hope of getting the COVID-19 vaccine, moderate investor positioning and the fact that companies are starting to register profits have created one of the best backdrops for stocks in years. For this, JPMorgan expects the benchmark S&P 500 to rise to 3600 points by the end of 2020, and the firm expects it to rise even higher to 4000 by early 2021.
As such, Kolanovic recommended investors turn increasingly overweight in stocks and can sell off bonds to fund this investment.
Kolanovic believes there is a slight chance of the Democrats winning the two run-off Senate races in Georgia, which would significantly help the next US President Joe Biden pass his tax plans that promised higher taxes for the rich and stricter regulations. This, according to Kolanovic, poses a short-term uncertainty.
Kolanovic believes that a divided government is not only beneficial to the US but the global market as well, just like the Biden win influenced the surge in global markets over 10 days ago. That said, JPMorgan expects emerging markets to rise, with overweight ratings on Russian, Korean, and Brazilian stocks.
The quant chief said that a weakening US dollar contributed to the group’s outperformance, helped by reduced geopolitical risk, cheap emerging-markets valuations, and light positioning.
Shifting to the cyclical sector
There was a massive move from growth stocks to cyclical stocks last week on Monday but cyclical stocks are still expected to rise. This is why Kolanovic recommended that investors should brace for a sustained rotation into value and cyclical names as the market prepares for an end to the pandemic.
Kolanovic predicts a breakout point for value stocks whereas momentum and growth stocks will most probably lag through the rotation.
The quant chief pointed to “unsustainably stretched” growth-to-value correlation and continued crowding in momentum stocks for the call. A “severe dislocation” between the two market groups remains, leaving plenty of opportunities left for those who missed the recent rotation.
Boost commodities, dump cash
As the economy recovers after the discovery of a potential COVID-19 vaccine, commodities in the cyclical sector like metals, energy, and agricultural products that depreciated and struggled during the pandemic are expected to surge. As investors move from value stock to cyclicals and growth stocks, gold is expected to sink.
“Our Oil Strategists believe the pandemic, not the election, is the main driver for crude, as oil markets need to clear current imbalances before long-dated prices can rise, and US production is likely to fall next year under any administration,” Kolanovic wrote.
JPMorgan suggested that investors should go underweight in government bonds even though US yields are still close to record lows, but the announcement of the COVID-19 vaccine lifted the bank’s medium-term outlook on government bonds. In doing so, investors will have funds to finance their commodity trade.
Holding cash? Uhm-Uhm. Not good idea according to JPMorgan because the dollar is set to weaken and you would miss sizeable gains across several markets. The bank put an overweight rating for corporate credit but suggested that declining bets on government debt should not scare away investors from bonds.
Underperforming stocks during the pandemic
During the pandemic, most companies struggled to stay afloat which affected their performance on the stock market. When Pfizer and BioNTech announced their vaccine last week on Monday, November 9, 2020, the surge in global markets saw these stocks that had been struggling during the pandemic rally, so it is safe to say investors expect these stocks to rise as the economy recovers.
Going for them at this time when they are still relatively cheap could turn out to be profitable in the long-term.
In Europe, JPMorgan’s strategists recommend investors to go for sectors that were hit hardest by the pandemic, as they will most probably outperform others. The non-cyclical stocks will lag relative to the broader corporate credit market.