In a note published on Monday JP Morgan stated that with the recent IPOs and retail investors flooding into markets, there are certainly "signs of potential exuberance popping up."
A stock market bubble is not a term that is bounced around lightly. The dot-com bubble of the late 1990s is probably the closest comparison to the current market, when investors drove up the share prices of technology companies (in March 2000 a three year run to a then-record peak saw the Nasdaq rise 400%, all of those gains were lost by October 2002).
The data backs this up. 2020 saw the highest number of IPOs since the tech boom. Special Purpose Acquisition Companies (SPACs) deals already have reached $17 billion in the first three weeks of the year alone (equal to 20% of the value of deals in the whole of 2020). This week's squeeze of big hedge funds' short positions in stocks like GameStop, where Retail investors pushed the company's share price up as much as a 1000%, is just another example of what happens with hot money.
"The abundance of liquidity, resulting from the extreme central banks actions to combat the COVID dislocation, is seen as the major driver of these potential excesses in financial markets," JPMorgan said.
The Fed's balance sheet grew by 80% last year and JPMorgan expects it to expand by another 20% this year before it eventually tapers its asset purchases.
"We would not expect the tapering fears to be a serious headwind for the equity market, at least not before the 2H of this year," it added.
JP Morgan said it is possible that the financial assets that had huge gains the past few quarters will see "much greater volatility, and experience bouts of profit taking, making their risk adjusted return less appealing," JPMorgan said.
"We would use any dips as opportunities to add. We continue to believe that the style rotation that we positioned for in early November will have legs, and importantly that it will likely happen against a backdrop of rising markets," the note added.
The recent rise in 10-year Treasury yields above 1% has spooked a few market-watchers.
JPMorgan is recommending an overweight position in these three sectors in Europe:
- Financials - Sector is cheap, has underperformed, earnings are improving and stands to benefit from a reflationary backdrop.
- Materials - Strong play on manufacturing sector upcycle/China acceleration. Trading cheap, has resilient balance sheets, breakeven prices are lower
With these themes in mind, JPMorgan is recommending 42 stocks, 15 are below:
- BP Ticker (BP.LN)
- Solvay Ticker: (SOLB.BB)
- Anglo American Ticker (AAL.LN)
- BHP Group Ticker (BHP.LN)
- ArcelorMittal Ticker (MT.NA)
- Saint Gobain Ticker: (SGO.FP)
- Andritz Ticker (ANDR.AV)
- Signify Ticker (LIGHT.NA)
- Rexel Ticker (RXL.RP)
- EasyJet Ticker (EZJ.LN)
- Volvo Ticker (VOLVB.SS)
- BMW Ticker (BMW.GR)
- Kering Ticker (KER.FP)
- Barratt Developments Ticker (BDEV.LN)
- Marks & Spencer Ticker(MKS.LN)