The war in Ukraine has dimmed prospects for aggressive Federal Reserve rate hikes and that should bolster American equities even as markets endure a bout of volatility in the coming weeks.
That’s the view of JPMorgan Chase & Co. strategists led by Marko Kolanovic, who have repeatedly urged investors to buy the dip during the global equity rout this year. In a fresh note released Monday, the top-ranked strategist says the direct impact on U.S. corporate earnings from the conflict should be “small."
While advising investors to go underweight European assets given the region’s vulnerability to any escalation after Russia’s invasion of Ukraine, Kolanovic pointed out that the crisis has forced the market to price in diminished odds of a 50-basis-point rate hike in March.
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Other reasons why the selloff has likely run its course: announced sanctions on Russia appear to have limited impact on economic growth and energy prices are contained so far. Moreover, with the Nasdaq 100 having fallen to the brink of a bear market, tech stocks are poised for a rebound.
“The worst might be behind us for risk assets," Kolanovic wrote in the note. “Indirect risks are more substantial, given effects of higher commodity prices on inflation, growth, and consumers; however, one silver lining is that the crisis forced a dovish reassessment of the Fed by the market."
Stocks have been on a wild ride lately as traders struggled to get a grip on the path of monetary policy amid intensified geopolitical tensions. A gauge of risk appetite tracked by Goldman Sachs Group Inc. turned negative, entering a territory that tends to foreshadow equity gains.
Still, Goldman strategists including Cecilia Mariotti and Christian Mueller-Glissmann warn that it’s too early to call all clear.
“While the asymmetry for medium-term returns tend to be more positive from such bearish levels, large drawdowns are still possible, especially within a high vol regime," the Goldman strategists wrote in a note. “Geopolitical risks might be repriced quickly, but more clarity on the growth/inflation mix is likely needed for a sustained pick-up in risk appetite."
Kolanovic, ranked No. 1 in equity-linked strategist in last year’s Institutional Investor survey, has been one of the staunchest equity bulls, favoring cheap, economically sensitive stocks. Last month, his team told clients to buy beaten-down stocks such as small caps after those companies priced in an economic recession -- spurred by hawkish policy mistake by the Fed -- that’s unlikely to occur.
Now, Kolanovic sees growth stocks such as tech presenting a potential short-term opportunity after their recent rout. Still, over the medium term when real rates continue to rise, he favors value stocks and commodity-linked assets given the relatively attractive valuations.
