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JP Morgan’s Kolanovic sees a bubble in defensive and tech stocks




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Traders work on the floor of the New York Stock Exchange shortly after the opening bell in New York, January 24, 2020.

Lucas Jackson | Reuters

A bubble has formed in defensive and low-volatility stocks as coronavirus fears drove a record number of investors to those pockets of the market, according to JPMorgan’s quant guru Marko Kolanovic.

Since the coronavirus outbreak, hedge funds have shifted their allocation into low-volatility and defensive names on a record level, pointed out by Kolanovic, the bank’s global head of macro quantitative and derivatives strategy.

Defensive stocks are generally not tied to economic growth. They include utilities, health care and consumer staples stocks. JPMorgan reiterated its call to sell out of defensive assets and rotate into cyclical assets such as value stocks, commodity stocks and emerging markets.

“Bonds, momentum stocks, and low volatility stocks rallied – pushing the valuation spread between defensive and cyclical stocks to a level 2x worse than during the peak of the late-’90s tech bubble,” Kolanovic said in a note to clients on Wednesday. “The bubble we are describing is expressed in equity factors … We caution investors that this bubble will likely collapse, i.e. this time is not ‘different.'”

Kolanovic added some tech names are trading at “unsustainable valuations” supported by record level of speculative call option activity.

“Value stocks are typically on the other side of all of these trends that inflated this bubble,” Kolanovic said. The strategist had called the rotation into value stocks in September that rocked investors. He called it a “once in a decade” trade then.

— CNBC’s Michael Bloom contributed reporting.

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