In an interview on BloombergTV, JPMorgan’s head of Asia Pacific Equity Research James Sullivan says a shift out of growth stocks and into value stocks is underway. Sullivan points out that there are “very conflicting views” about the risk markets in relation to what actions the Fed is planning to take. At JPMorgan, the expectation is that the central bank will raise rates one more time—another 25 basis points at their May meeting—and then pause for the rest of the year. But rate markets are factoring in two or three rate cuts between that May meeting and the end of the year, creating a significant discrepancy between what the Fed has indicated and what markets are pricing in.
The most important thing to watch, Sullivan told Bloomberg, is the effect on the U.S. banking sector. More than $1 trillion has been drained from small and mid-sized banks over the last year, half of which was withdrawn since the SVB collapse. That outflow will have a negative impact on credit growth in the U.S., but with the Fed on pause for the rest of year it remains to be seen how that will impact the economy overall, Sullivan contends.
When asked about the rally in China, which has slowed down recently, Sullivan points to two key structural changes happening in China right now. The first is SEO (state-owned enterprises) reform, as management teams see their compensation linked not to earnings growth, as before, but balance sheet efficiency. That’s going to lead to more buybacks and “capital efficiency mechanisms” being used, resulting in a positive impact on share prices, Sullivan believes. The second change is that pension reform could potentially build a significant investment pool that could bolster equity markets.
Meanwhile, the Chinese tech sector has generally been dragged down by a restrictive overhang, but it appears that might be loosening as the gaming space opens up. And executives at Tencent have made statements indicating loosening in the financial tech space as well, particularly in the ability to launch new products, which hasn’t been seen for a while. In addition, the mayor of Beijing as well as Premier Li have recently made comments that are supportive of private industry, Sullivan pointed out.
As for the tech market at large, when asked if the Nasdaq was on the cusp of a bull market and whether to rotate out of it, Sullivan posited his view that many investors have been using tech as a defensive sector. If “a broadening of economic performance” begins to happen, it’s possible that would “start to rotate into value sectors more aggressively than we’ve seen year to date,” Sullivan says, and JPMorgan’s stance is that rotation from growth to value is more likely in the second half of this year. And in regards to dollar strength, Sullivan reiterated JPMorgan’s view that 2023 will end with the Fed fund Raes hovering around 5 to 5, while markets are currently pricing in 4 to 3. If the JPMorgan prediction is correct, that would lead to “more dollar strength than is currently being implied in rate markets,” he told Bloomberg.