No Bubble Here, Just BTFD, Kolanovic Reassures JPM Clients

With bank after bank after bank piling on with warnings that the market is due for a substantial setback to ease some of the retail euphoria (without realizing that said euphoria will merely shift to squeezing the most shorted stocks), Wall Street was in desperate need of some cheering up. Today, one of Wall Street's biggest permabulls, did just that when JPM's Marko Kolanovic urged investors to ignore warnings about a bubble - despite clear evidence of a bubble everywhere one looks - and to just buy the dip on any fallout from the feud between retail investors and hedge funds.

Conceding that we have "seen a number of strategists calling for a market correction or indicating equities are in a bubble" coupled with recent "turmoil related to trading activity in small highly shorted stocks" the JPM quant disagrees and said that professional investors are far from bullish, as the firm’s model tracking computer-driven strategies to stock-picking funds shows their equity positioning sat in the 30th percentile of a 15-year range (which, of course, is for a reason namely the fact that the VIX remains remarkably sticky and vol control strategies simply can not lever up to historical levels, but we don't expect Kolanovic to dwell too much on what's really going on if there is an agenda to be promoted).

According to the Croat, there are 3 main reasons for the firm's (perpetually) rosy outlook:

  1. equity positioning is low in a long-term historical context, and we expect it to increase;
  2. we expect the COVID-19 pandemic to rapidly subside at the back of vaccines and population immunity (already started to happen);
  3. we expect monetary and fiscal support to remain in place, driving consumption, global trade and demand for goods, and supporting higher inflation. In that light, any market pullback, such as one driven by repositioning by a segment of the long-short community (and related to stocks of insignificant size), is a buying opportunity, in our view.

"In that light", Kolanovic notes, "any market pullback, such as one driven by repositioning by a segment of the long-short community (and related to stocks of insignificant size), is a buying opportunity, in our view."

The JPM strategist then gives some more detail behind his three core views, starting with his view how funds apparently are not that bullish, despite today's mauling of the most popular hedge fund positions which are being dumped en masse ahead of upcoming anticipated liquidations to meet margin calls:

Positioning across risky asset classes, and in particular in equities and commodities, in a long-term historical context is low. Our analysis shows that equity positioning is in the 30th percentile relative to the past 15 years, both for systematic and discretionary managers. The reason for this is simple: market expectations of volatility and tail risk are still very high (e.g., as indicated by VIX, variance convexity, etc.), and historically that has been the main impediment for institutional buying of equities. Figure 1, below, shows the equity beta of global hedge funds as well as our model for equity exposure (percentile) of systematic investors – they are largely following (inverse) volatility, and currently there are no signs of exuberance in institutional equity positioning. Here, we also want to discuss the question that we often get: “how come data from prime broker xyz shows that exposure is high?” The reason is often combination of these factors: prime data tend to have a short history of 1-3 years (and in the context of the global pandemic and trade war/manufacturing recession of past 3 years, indeed net positioning is above average). However, 2021 should be a transformative year of COVID recovery, and looking at a 1-3 year history is not sufficient.

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