JPMorgan has recommended to its clients that they bolster their cash and gold positions while scaling back on equities and bonds.
According to the bank’s analysts, the current surge in equities is misguided due to the market’s failure to adequately factor in the significant risk associated with raising the debt ceiling, particularly considering that negotiations are still far from completion.
Even if an agreement is reached, analysts caution investors about the unfavorable risk-reward ratio in stocks.
They point out several factors, including the increased likelihood of a recession, inflated valuations, high-interest rates, and tightening liquidity, as the main reasons behind their stance.
In a note, the analysts stated, that there is a divergence between the expectations of rate markets, which anticipate the Federal Reserve to implement rate cuts this year, and equity markets, which view such potential cuts as a positive sign of risk.
Meanwhile, the Fed has adopted a more hawkish rhetoric.
This gap is expected to narrow, resulting in a negative impact on equities.
Rate cuts are likely to occur only during a risk-off event, and if rates remain high, they are likely to weigh on equity valuations and economic activity.
Consequently, JPMorgan has decided to increase its cash allocation by 2% by reducing exposure to both stocks and bonds by 1% each.
The analysts also added, “Regarding commodities, we are shifting our focus from energy, considering the risks of a recession and a potential decline in China’s growth momentum, to gold. This change is driven by gold’s appeal as a safe-haven asset and as a hedge against the debt ceiling issue.”
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