JPMORGAN: US stocks are staring down a double whammy of spiking COVID-19 cases and an uncertain election — but traders shouldn't stay away entirely. Here are 3 strategies for those looking to stay invested.
JPMorgan cross-asset strategist John Normand is telling investors to maintain positions in US stocks even as the spreading coronavirus and the impending election generate more uncertainty. Normand says the US is still posting stronger growth than much of the rest of the world, and investors shouldn't give up on that. He's telling them how to adjust their sector and regional exposures to reduce risk without surrendering that potential upside. Click here to sign up for our weekly newsletter Investing Insider. Visit Business Insider's homepage for more stories.
A furious stock market rally, a resurgence of the novel coronavirus, and a presidential election that's drawing nearer is a combination that makes for incredible uncertainty. John Normand, head of cross-asset fundamental strategy for JPMorgan, says it has some investors asking if it's time to steer clear and flock to safety instead. "The US is the only economy now at the intersection of a second wave and political risk, which is why investors often ask whether US equities and the dollar should be underweighted in global portfolios now," he wrote in a note to clients. Normand says that an investor who adopted that strategy would miss out on the US' stronger-than-average economic growth and the trends benefiting the dollar. He says it also reflects an overly simplistic view of the political landscape, as a Biden administration might raise corporate taxes but its programs could also benefit several sectors. "The most positive outcome would be a Biden victory alongside a Republican Senate, which implies fewer market disruptions from foreign policy and no change in tax policy," he wrote, adding that even a Democratic "blue wave" could be neutral or positive for stocks over the next few years. That means the solution is being more selective. "Rather than underweighting US assets broadly, there is better risk-reward in owning tech/quality to hedge the second wave, only favoring North Asian equities and FX to hedge the virus plus a Democratic sweep, or just staying long gold," he said. Digging into the equity part of Normand's thesis yields these three recommendations. (1) Buy tech Thanks to the waves of work-from-home investment and growth in e-commerce since the pandemic started, tech stocks have been very strong performers. Normand says that should continue because of the strong earnings of tech and communications companies, so he recommends overweighting them. "COVID-19 has either reinforced or broadened several pre-crisis structural trends, such as the earnings power of Big Tech," he wrote. Since Biden hasn't said he intends to try to break up the big US tech companies, Normand doesn't see much political risk for the stocks in 2021. Strategy: Investors who find this notion compelling can get exposure using exchange-traded funds like the ARK Next Generation Internet ETF, SPDR S&P Internet ETF, and O'Shares Global Internet Giants ETF. (2) Healthcare stocks The healthcare sector has also brought in solid returns lately, and Normand says JPM's analysts maintain an overweight on the sector. He notes that Biden's more expansive health insurance proposals could bring more business to many companies in the field. While investors have been snapping up COVID-related testing and vaccine companies, he notes that there are some important negatives for other companies in the sector. "Healthcare is second-best to Big Tech given that virus related hospitalizations imply revenue strain from a deferral of elective procedures," he said. Strategy: ETFs in this space include the Vanguard Health Care Index Fund and the Fidelity MSCI Health Care Index ETF. (3) Emerging markets Normand's final recommendation is rooted in geography rather than sectors. He says that if investors are worried about the health of the US economy, they should understand that weaker growth in the US doesn't indicate anything about the performance of other developed markets. "The possible dampening of US growth momentum relative to the rest of the world has been a more reliable signal for US vs EM equities than for US versus Europe and Japan," he said. "Owning Europe would become more compelling if the Biden agenda entailed an explicit commitment to break up Big Tech." He is bullish on North Asian stocks in particular because South Korea and China have been more successful in stopping the spread of the novel coronavirus than other emerging market nations. Strategy: Funds that target those countries include the iShares MSCI South Korea ETF and Xtrackers MSCI All China Equity ETF, while ETFs focused on emerging market nations more broadly include the Van Eck Emerging Markets Fund. Read more:
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