JP Morgan's equity strategy team has urged investors to use the current market weakness as a buying opportunity, arguing that the economic backdrop underpinning the sell-off bears little resemblance to the damaging stagflationary environment of 2022 that inflicted prolonged losses across both equity and bond markets.
Writing in its April chartbook, strategist Mislav Matejka said that while sentiment had turned sharply bearish and positioning had been reduced to levels approaching those seen around Liberation Day, the fundamental picture entering the Iran conflict had been strongly supportive, and the bank does not view stagflation as the most likely outcome in the second half of the year.
The key distinction from 2022, JPM argues, is that wage growth is now moving lower rather than accelerating, and corporates are unlikely to be able to raise prices in the current environment, reducing the risk of an entrenched inflationary spiral of the kind that forced central banks into aggressive rate rises four years ago.
On the conflict itself, the US investment bank said headwinds against a prolonged war lasting months rather than weeks, spanning energy prices, political constraints and military considerations, were not diminishing, suggesting the bank sees meaningful scope for a resolution or de-escalation that could rapidly reverse the recent risk-off move.
The bank cautioned that if oil prices rise further, equities will fall more, but said the risk of being caught offside by a positive headline was significant for anyone trading on a short-term basis, and that investors with a three, six or twelve-month horizon should be adding exposure to the weakness.
On a regional basis, JP Morgan said its preference for international markets and emerging markets over the United States, flagged in its November Year Ahead publication, remained intact.
It noted that MSCI World ex-US had risen 11% year-to-date ahead of the conflict against flat returns for US equities, and that while the US had briefly outperformed in the initial risk-off phase, American equities had stalled again more recently.
The bank also maintained its preference for value stocks and small caps over growth.