BTFD represented in JPM:
In 2021, we warned about the commodity supercycle and energy crisis; we also warned about the bubble in innovation, renewables, etc, and on the front page of our year ahead outlook in December we warned about geopolitical risks as a key risk in 2022. It is our assessment that these forecasts have now nearly fully materialized. While the commodity supercycle will persist, in our view, the correction in bubble sectors is now likely finished, and geopolitical risk will likely start abating in a few weeks’ time (while a comprehensive resolution may take a few months). Markets may anticipate these turning points sooner, and we think it is time to start adding risk in many areas that overshot on the downside year to date.
We note that not all assets are cheap, and one can still find expensive segments in mega caps, defensives and low volatility stocks that are sensitive to rising rates, a slowing US economy and factor rotations. However, there are great opportunities in high beta, beaten down segments that now include innovation, tech, biotech, emerging markets (e.g. China), as well as more broadly in smaller capitalization and more volatile stocks (see here). These segments are already pricing in a severe global recession, which will not materialize in our view (though it is not possible to rule out a recession in Europe and further slowdown in the US). From the time when we called the bubble, these segments are down 60-80%, which we think is the end of the correction and in some areas represents a liquidity-driven overshoot.
