JPMorgan Chase & Co. strategists are betting that the latest record shift into value stocks can endure much longer after years of lagging growth equities.
“Our equity strategy team believes that we are on the cusp of a sustained rally in value comparable to what we saw in 2016-2017,” said strategists including Davide Silvestrini and Marko Kolanovic. “This rotation has room to continue much further given the material underperformance we have witnessed in recent years.”
Whereas the rotation into cheaper value stocks took a breather on Wednesday, the strategists say there is still room for further normalization as a large part of the initial rally was driven by the short-covering of short-momentum strategies, which buy the past year’s winners and sell its losers.
JPMorgan analysts are weighing in on the potency of a sudden change in market leadership after the world’s cheaper stocks surged the most ever relative to their faster-growing peers on Monday. The MSCI All-Country World Value Index jumped almost 6% at the start of the week, while its growth counterpart fell 2% as investors rotated out of defensive technology names and into shares that have suffered from the lockdowns.
The rotation into cheaper value shares can also drive gains in European stocks relative to the U.S., said the strategists, forecasting an outperformance of up to 5% for the Euro Stoxx 50 by December, as the European benchmark has a much higher presence of cyclical and value stocks compared with the S&P 500.
To take advantage of value’s rally in the near term, JPMorgan recommends buying December 2020 at-the-money call options on the outperformance of Euro Stoxx 50 versus the S&P 500 at 0.85%.
For those market players who believe the rotation can continue for longer, the strategists propose buying worst-of call options on European sectors that have trailed this year, such as June 2021 105% worst-of calls on European bank, insurance and oil and gas indexes. Alternatively, they also advise looking at worst-of call options on the IBEX 35, FTSE MIB and Euro Stoxx 50 indexes.
Europe has underperformed the U.S. in the recovery rally since March lows and unlike the S&P 500, which is trading close to a record high, the Stoxx 600 and Euro Stoxx 50 are still about 12% away from historical levels.
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