It's time to bet on risky cyclical stocks, top JPMorgan strategist says

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Traders work on the floor at the New York Stock Exchange, March 2, 2020.

Brendan McDermid | Reuters

The world economy will bounce back quickly from the coronavirus outbreak, and investors should buy into cyclical stocks to catch the comeback, a top JPMorgan strategist said.

The hit to the global economy during the first quarter will largely be made up later in the year, global asset strategist Marko Kolanovic said in a note to clients on Wednesday.

“We had been trimming risk from our model portfolio the past couple of months given the strong market rally and uncertainty around this epidemic, but we now see the risk/reward as increasingly skewed to the upside for risky assets and use the current pullback to add back to cyclical exposures at the margin,” Kolanovic said. 

The model portfolio for the JPMorgan team is overweight small and mid-cap stocks and the value and cyclicals categories, according to the note.

“We expect the impact of COVID-19 to be temporary and mitigated by broad policy stimulus, even as the virus spread is proving more severe than anticipated,” Kolanovic said. 

The U.S. stock market has traded wildly in the past two weeks as investors try to determine the impact of the the outbreak on businesses. 

Helpful policies from central banks and governments will help economies rebound, and the improved political fortunes of former Vice President Joe Biden should continue to boost markets, Kolanovic said.

The Federal Reserve implemented an emergency 50 basis point cut of its benchmark interest rate on Tuesday, while Biden won several key states over Vermont Sen. Bernie Sanders, his democratic socialist opponent. 

The model portfolio is also overweight European and emerging market equities relative to the U.S., according to the note, because European stocks are better positioned to benefit from aggressive stimulus in Asia. 

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