Investment bank JPMorgan believes that cyclical stocks will lead the market higher in the medium to long term as the business cycle improves.
“You will see cyclical and more defensive names continue the rally after we get through this adjustment period,” said James Sullivan, head of ex-Japan Asian equity research at JPMorgan.
Cyclical stocks are companies whose underlying companies tend to follow the business cycle of expansion and recession. Some of these include sectors such as finance, energy, and industry. Defensive stocks – like healthcare and consumer staples – tend to offer steady profits and dividends regardless of market conditions.
Global stock markets have fluctuated over the past few weeks as bond yields rose, driven by optimism over vaccines for Covid-19 and the resumption of consumer spending.
The move raised expectations of higher inflation, and investors feared it would push central banks to raise interest rates. Higher interest rates can put down stocks with relatively high valuations.
A forex trader looks at a monitor in a trading room.
SeongJoon Cho | Bloomberg | Getty Images
Interest rate concerns also accelerated a market rotation – as investors took money from expensive technology and growth stocks and poured them into other cyclical sectors like finance, energy and industrials. Stocks have rallied in recent sessions, but analysts continue to expect market conditions to remain volatile.
“What we’ve seen is a very, very strong increase in value. You will likely see a surge in growth that can be attributed to the end of this market movement,” he said on CNBC’s Street Signs Asia on Wednesday.
“However, in the medium to long term, we are still seeing cyclicals and defenses driving this market higher,” added Sullivan.
JPMorgan positive on financials, consumer stocks
The steepness of the yield curve has a positive impact on the overall profitability of large financial institutions, Sullivan said, adding that the investment bank is overweight in both banking and insurance. Financial firms typically benefit from rising interest rates as they increase their profit margin.
A steeper yield curve occurs when the interest rates for bonds with a longer term rise faster than the interest rates for bonds with a shorter term. This typically suggests that investors expect inflation to rise and economic growth to be stronger.
JPMorgan is also positive on consumer stocks, according to Sullivan. “We are seeing very strong consumption trends across the board,” he said, adding that the bank would be positive for both finances and consumers as a result. “
With economies around the world reopening, consumer spending is expected to resume due to better growth prospects and stimulus measures. Overnight in the United States, President Joe Biden signed a massive $ 1.9 trillion coronavirus aid package that is giving Americans their hands on money.
Tech: Ratings “pretty high”
Tech stocks were a big beneficiary in the markets last year as the coronavirus pandemic threw global growth off track due to lengthy lockdowns around the world. Investors and traders, who typically turn to less risky assets to weather market volatility, put money in technology and software stocks that benefited from the lockdown.
“Overall technology leadership in the markets has been taken to extremes over the past year,” Sullivan said, adding that despite some of the recent sell-offs of technology names, “we are seeing valuations that are relatively high.”
JPMorgan argues that technology investors should deviate from platform names and move into companies that sell software as a service and move into the semiconductor space as the global chip shortage persists.
“We don’t necessarily see the big platforms pulling these markets higher for the rest of the year,” added Sullivan.