In its latest report, JPMorgan Chase maintains a preference for a "technology + cyclical" portfolio in its equity allocation strategy, while also recommending the inclusion of healthcare as a third pillar to offer investment opportunities with low correlation to macroeconomic trends:
1. Technology Sector: Potential for Oversold Rebound and Mean Reversion: The forward P/E ratios of the seven major US stocks (excluding semiconductors) are at extreme levels, two standard deviations below their 2018 average. Mean reversion implies approximately 56% upside potential. Current market concerns about AI investment returns (ROI) are excessive, as the backlog growth of mega-corporations (+150%) far exceeds their capital expenditure growth (+80%). Mean reversion trading is favored, particularly for AI-related stocks in the Asia-Pacific region, such as South Korea.
2. Cyclical Sector Shift Towards Industrial Stocks: A shift in focus from financials and consumer sectors to industrial stocks is recommended. This is because industrial stocks are expected to benefit from improved global economic and earnings data, as well as a reassessment of risks associated with the AI theme.
3. Uncorrelated Allocation and Hedging: Healthcare, as a third pillar with low correlation to macroeconomic trends, remains a valuable investment opportunity.
4. Emerging Markets: Tactically bullish on Hong Kong stocks. Hong Kong stocks are seen as a major beneficiary of AI infrastructure and commercialization, but their gains have lagged behind those of South Korean, Taiwanese, and A-shares. We recommend taking profits on AI supply chain stocks that have seen excessive gains and are heavily over-leveraged. On the other hand, we suggest a tactical long position in Asian refiners, who benefit from geopolitical uncertainties pushing Asian refining margins to record highs. (Source: JPMorgan Chase)
