JPMorgan Asset Allocation Team Cuts Back on Credit to Hedge a Big Equity BetBy
More direct option-based hedges seen as prohibitively costly
Sees buying opportunity in equity dip, but chance of a drop
JPMorgan Case & Co. asset-allocation strategists just increased the bullishness of their equities stance -- and hedged it with an underweight recommendation in corporate credit.
Boost equities to +15 percent of benchmark from a previous +12 percent, while taking bonds to zero from a previous -7 percent and sending credit to -10 percent from zero, strategists Nikolaos Panigirtzoglou, Marko Kolanovic and John Normand wrote in a note Thursday.
“This credit underweight does not reflect a standalone negative view on credit but, instead, our desire as asset allocators to hedge our very bullish equity stance,” the strategists said. “While it is encouraging that credit and other asset classes such as EM, commodities and currencies have not been affected much by the equity market sell-off, we believe there is a chance that these asset classes will catch up and underperform if we are wrong and equity markets decline rather than rally over the next month.”
JPMorgan still sees the recent dip in global equities as a buying opportunity, believing the fundamental drivers of the rally, such as still-low real yields, robust global growth and profit-margin expansion due to U.S. tax reform, are still in place.
“We are reluctant to resort to more direct option-based hedges as an alternative way to hedge our bullish equity stance instead of underweighting credit,” the strategists wrote. “Potential hedges we have considered in the past include equity puts, unconditional or conditional on rates or gold, or yen calls again unconditional or conditional on rates or gold. However, the rise in volatility across the board, the shift in correlations and the rise in bid-ask spreads has made these hedges prohibitively expensive.”