Best global stocks to buy during the recovery according to JPMorgan
While JPMorgan said in a Sept. 29 research note that its European team has had a “positive view on equities, economic growth, and higher inflation expectations alongside our colleagues since the summer of 2020,” it is now more cautious.
According to the analysts, the economy has transitioned from a “expansion” phase to a “slowdown,” as evidenced by factors such as a drop in confidence among German manufacturers and lower global earnings per share revisions, a key measure for investors.
“The cycle’s Slowdown phase supports an overweight in sectors such as Technology, Staples, Discretionary, and Health Care… “There are also underweights in Financials, Energy, Communication Services, and Utilities,” the analysts wrote.
JPMorgan named “inexpensive” names in a list of “Top (long) Value Screen” stocks. A long position is an investment that is expected to appreciate in value over time.
The top stocks on the screen are Atos, a French IT company, Fresenius, a German health care firm, Telecom Italia, and Imperial Brands, a tobacco company.
JPMorgan screened for “High Growth” stocks in a separate list, which included Danish biotechnology firm Genmab, Swedish venture capital firm Kinnevik, parcel locker company InPost, drinks firm Remy Cointreau, and Norwegian oil group Lundin Energy.
JPMorgan chose investment manager Hargreaves Lansdown, medical company Coloplast, consumer electronics firm Logitech, real estate business Partners Group, and private equity firm EQT for its “High Quality” screen.
Larger firms are also supported by a slowdown phase, according to the analysts, and the bank chose Nestle, Roche and Novartis, luxury group LVMH, and semiconductor supplier ASML.
“We believe that extreme valuations should be avoided, as should stocks with high variability in earnings and dividends as profit revisions and macro inputs soften from their peak,” the analysts added.
Bank of America upgrades the Indian car industry
In India, auto stocks have lagged behind the market and other sectors. The National Stock Exchange’s auto index is up about 33% year on year, compared to a 54% increase in the benchmark Nifty 50 index or a 69% increase in the index for banking stocks.
However, in a September 29 report, BofA said that trend could reverse for auto stocks as the chip shortage and commodity headwinds ease.
The global semiconductor shortage has wreaked havoc on the auto industry, forcing automakers to reduce output as supplies were diverted to consumer electronics at the start of the pandemic. According to the consulting firm AlixPartners, the shortage will cost carmakers $210 billion in revenue in 2021.
Lower commodity prices may also encourage the purchase of new cars in the coming months. Oil prices have risen this year as demand has rebounded, with crude benchmarks reaching multi-year highs this week.
According to the BofA note, one key metric to monitor will be demand, which typically rises during India’s festive season in the fourth quarter of the year.
The bank has two “key picks” that it believes will gain more than 10% in the next 12 months.
According to BofA analysts, Bajaj Auto is exposed to the “right segments” of the market — premium, exports, and e-scooters.
According to the report, the company’s market share in India has increased, and it has “strong export growth prospects.”
It warned of downside risks such as a prolonged slowdown in India, currency volatility and rising crude prices, which would affect export demand, as well as competition from electric vehicle manufacturers.
The bank has set a price target of 4,500 Indian rupees, a 19% increase from the previous day’s close.
Hero Motor Corporation
According to analysts, motorcycle and scooter manufacturer Hero Motocorp has a compelling risk-reward ratio and is likely to see an increase in demand during the holiday season.
Risks to the moderate growth outlook include extended weakness in two-wheeler demand, capital commitment to its subsidiary Hero FinCorp, and disruption from electric vehicles — though the latter is unlikely to occur in the next two years, according to the BofA report.
Hero Motocorp has a price target of 3,200 Indian rupees, up 14% from Wednesday’s close.
Commodities and health-care services
According to Bank of America, energy and metal companies may benefit as well, while the health care sector may lag the overall market.
BofA’s “preferred pick” is Hindalco, which has a price target of 605 rupees, or a 27 percent increase from Wednesday’s close. Earnings for aluminum and copper manufacturers are expected to rise as aluminum prices rise. Analysts believe the company is also in a better position than Chinese competitors, which face higher power costs.
Lower-than-expected aluminum prices, currency appreciation, and lower automaker demand for aluminum are all risks to the outlook. On the other hand, higher-than-expected metal prices and rupee depreciation could propel Hindalco’s stock price even higher.
Separately, coal prices have risen due to increased demand, which analysts believe could boost earnings or profits for companies such as Coal India and Tata Power.
Higher oil prices may hurt aviation, paint, fast moving consumer goods, truck operations, and oil marketing companies due to higher costs, but they may benefit container logistics firm Concor and upstream oil company ONGC, according to BofA.
Analysts also downgraded health care from neutral to underweight because the risk of a third Covid wave is decreasing and vaccinations have made “robust progress.”
Investors withdraw from equity risk
While the market has a shaky technical foundation and a stagnant news stream, confusion has taken the place of confidence as investors prepare for a global economic soft patch and reduced investor expectations.
Another twitchy, indecisive session in the vicinity of recent lows and the S&P500’s 4,300 level (the +15 percent YTD threshold). Is this what we’re doing now, oscillating around the 100-day moving average after a failed bounce and a thick fog of policy uncertainties (election then, fiscal/debt ceiling/Fed outlook now)? Granted, the election last year was a clear, defined pivot event, the correction was already deeper, and the recovery cycle was less mature, but it’s worth remembering.
Given that the market trades even more on short-term technicals during corrective phases, there is a lot of focus on levels where rallies could logically be sold – the high 4,300s up to 4,430 or so – and downside targets where traction could be found near 4,200. (near July lows).
Options flow and positioning work are very visible these days, implying an unsettled tape with downside risk heading into next Friday’s options expiration. This would fit with the broader seasonal pattern of a weak first half of October followed by a stronger second half of the month for stocks.
The combination of slowdown realities (Atlanta GDPNow down to 1.3 percent for the third quarter, earnings estimates cooling, global energy stresses stifling recoveries) and solid domestic trends is a big driver of the confusion (aside from the stock-price action itself) (Covid cases falling hard, reopening dynamics reengaged, consumer spending power intact).
Today, megacap tech is attempting to capitalize on the restored calm in Treasury yields and still-oversold conditions to act as support for the tape, picking up some slack from pressured banks, industrials, and consumer-cyclicals. The theme of sloppy rotation is similar.
Overbought conditions are causing some volatility in energy prices. Natural gas appears to be the new lumber, according to the stunning chart that almost everyone was obsessed with for a while. We await reports of a hedge fund being taken out (or others making a fortune) on this move, which is often a part of the conclusion to such thrilling market stories.
Energy prices at new highs are unquestionably a drag on business activity/consumer psychology, particularly in Europe and elsewhere, but the question is when all of that is fully discounted. Consumers in the United States can and did tolerate much higher energy prices a decade ago. Today is a big give-back day for oil and gas stocks.
Is a full flush of downside investor surrender, liquidation, fear spike, and new high in Volatility Index required to set a more reliable low? Maybe. Things have remained orderly and uncomplicated, though one reason for VIX’s relative sluggishness is rotation – lower correlations among sectors suppress index-level volatility.
On the notion of an expectation reset, we saw a drop in investment-advisor bullishness this week, as well as the narrowest bull-bear spread since April 2020, making investors even more cautious than during last fall’s correction. In the end, this creates a good contrarian bullish signal for the market, but it could certainly go lower first.
To summarize, a massive 100 percent rally off the March 2020 low, a 20 percent YTD gain through August, and record stock-fund inflows in the first half of 2021 sent public equity allocations to all-time highs. After the simple dip-buying strategy failed in recent weeks, investors realized they didn’t “need” any more equity risk.
So we’re repricing stocks, reintroducing the possibility of positive earnings surprises, and readjusting valuations slightly. Not a bad thing unless the market sees “slowdown + Fed policy error” as a high probability. Not clearly there yet, and it’s possible that it never will be.
On the NYSE, market breadth is strongly negative, with a 1:6 up:down volume split, whereas on the Nasdaq, volume is more evenly split. The S&P500 equal-weight index lags behind the main index.
As previously stated, VIX appears to be underplaying market choppiness, possibly due to pre-hedging throughout September, possibly because we haven’t made serious lower lows in a while, and possibly because correlations among sectors haven’t surged to reflect a “get me out of everything” mentality.
JPMorgan upgrades Schlumberger
“Our upgrade reflects the company’s advantageous portfolio, which is poised to deliver strong earnings growth from global upstream spending recovery and further margin expansion.” “Our positive thesis is based on our belief that U.S. [exploration and production] capex restraint will result in less U.S. shale growth.
According to JPMorgan, U.S. companies’ caution in expanding capacity would result in a sustained higher price for oil, because U.S. companies have recently been able to produce it more cheaply. Schlumberger, which has a high level of exposure to international producers, should benefit from this.
“For the better part of the last decade, U.S. shale has been the marginal supply source, largely limiting oil prices at the marginal cost of U.S. shale in the mid-$50s or lower.” “We expect this dynamic to shift in 2022 and beyond, with OPEC+ poised to resume its role as the marginal producer (i.e., the highest cost barrel required to meet demand) beginning in 2022,” the note said.
Oil prices have risen dramatically in the last six weeks, with European benchmark Brent crude exceeding $80 per barrel.
During the oil rally, Schlumberger has lagged behind its peers in the energy sector. Since the end of July, the stock has gained less than 4%, while the Energy Select SPDR Fund has gained 10%.
JPMorgan raised its price target on Schlumberger from $28 to $37 per share.
Stocks to balance volatility spikes
The fourth quarter is often characterized by high levels of trading activity as investors close out their positions for the year and plan for the coming year. This year brings a slew of concerns, including a fight over the debt ceiling in Washington, rising inflation, and rising interest rates.
The Cboe Volatility Index, or VIX, jumped nearly 9% to above the 23 level on Wednesday morning, indicating choppy market conditions. The VIX index tracks the level of fear on Wall Street by analyzing the prices of options on the S&P500.
Analysts identified the last five months in which the VIX increased by more than 40% in a single month, excluding the pandemic sell-off in February and March of 2020. We discovered five months with significant increases in volatility: September, January, October 2020, May 2019, and December 2018.
We identified the stocks that had the best average performance during those months, with no less than a 2% loss on average. To find the most consistent performers, we excluded any stocks that fell more than 6% during any of the volatile months.
The screen on analysts produced stable companies with consistent cash flows. Many of the stocks on the list have a defensive trend, which means they tend to be stable regardless of how the overall market performs. Utilities, health care, and consumer staples are typically classified as defensive sectors by market strategists.
Consolidated Edison tops the list, with an average loss of only 1.9 percent during periods of volatility. Exelon, NiSource, and Pinnacle West Capital are among the other utilities stocks in the screen.
Analysts’s screen also shows health-care stocks. During VIX spikes, Quest Diagnostics gained an average of 0.7 percent.
Hershey’s is another consumer staple stock that makes the list, with an average decline of only 1.7 percent during volatile months.
Other companies listed on analysts’s screen include auto parts retailer AutoZone, insurance firm Chubb, and software firm ServiceNow.
Investors hold Bitcoin stocks on the long term
“We pay close attention to long-term holders as a cohort because they have demonstrated an enviable ability to time market tops in the past,” Rinko said.
“This cohort is made up of crypto OGs who can usually sense when the market gets too frothy and are all too happy to offload some bitcoin onto retail at the top of market cycles,” he explained. “Then, during bear cycles when no one is looking, these long-term holders accumulate bitcoin, effectively setting a floor for bitcoin’s price.”
Rinko went on to say that long-term holders have been “rapidly accumulating at a pace we’ve never seen before” since the May crash this year, and that retail investors are “nowhere to be found in the data we’re looking at.”