JPMorgan’s Kolanovic Says Add Risk Assets on ‘Peak Hawkishness’

(Bloomberg) — Marko Kolanovic’s repeated dip-buying calls are failing to play out so far this year, but he’s sticking to his bullish stance on risk and urging investors to increase holdings in beaten-up corporate bonds.

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The top-ranked strategist at JPMorgan Chase & Co. told clients to reduce their exposure to cash and government debt, shifting the money to credit.

With the Federal Reserve pushing back on an interest-rate increase of 75 basis points in coming months and the Bank of England stressing growth risks during policy meetings last week, the market has reached “peak hawkishness” from central banks, he said in a note Monday. The prospect of less-hawkish-than-expected monetary policy, government support in China, light investor positioning and healthy corporate balance sheet all suggest it’s time to add risk.

“The most attractive way of fading the recent surge in risk aversion/volatility is by increasing allocations to credit, where spreads and yields look high,” Kolanovic wrote. “As a result, we increase the corporate bond allocation in our long only portfolio by 4% and fund this increase by equal reductions in allocations to cash and government bonds.”

The credit market has suffered losses in all but three weeks this year as the specter of higher interest rates prompted investors to cut debt holdings. In the first four months, the Bloomberg US Corporate Bond Index dropped 13%, the worst start of a year since at least 1973. The benchmark fell another 1.3% last week, sending its yield to the highest level since the pandemic crisis in March 2020.

Kolanovic, voted the No. 1 equity-linked strategist in last year’s Institutional Investor survey, has been a steadfast bull in risky assets despite this year’s turmoil. Over the last two weeks, when the equity rout worsened, he forecast the stock market was poised for a rebound, partly because pessimism had gone too far. That prediction has yet to materialize, with the S&P 500 falling more than 3% Monday after five straight weeks of declines.

In the latest note, the strategist remains constructive on equities, saying fears over an economic recession as reflected in parts of the market are unjustified.

“The past week’s selloff appears overdone, and driven to a large extent by technical flows, fear, and poor market liquidity, rather than fundamental developments,” Kolanovic said. “While we expect growth to soften, we continue to push back on a base case assumption that the global economy is headed for recession, an outcome that is increasingly being priced by markets.”