The value-stock rally won't be as strong as investors expect as bond yields stay low, JPMorgan says
- JPMorgan Asset Management's Patrik Schöwitz told CNBC on Monday he's not "overly optimistic" on the rotation into value stocks because he expects bond yields to stay low.
- "Traditionally, you need to see rising bond yields to actually have a big value rally," the global strategist said. "That's partly to do because financials are a big part of the value universe and they like higher bond yields."
- Schöwitz sees aggressive central bank action limiting the rise of bond yields, leaving him "not quite as bullish" on the value rally than others on Wall Street.
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Ongoing vaccine developments have prompted many investors to finally pivot into value stocks following a year that was dominated by mega-cap technology and other growth stocks, but JPMorgan Asset Management's Patrik Schöwitz is cautious on the strength of the value rally.
In a Monday interview with CNBC, the global strategist said the value rally has legs, though he's not "overly optimistic' because bond yields are likely to stay low and hamper major value sectors like financial stocks.
"Traditionally, you need to see rising bond yields to actually have a big value rally," Schöwitz said. "That's partly to do because financials are a big part of the value universe and they like higher bond yields."
He said that the potential for bond yields to rise in the near-future is limited by "aggressive central bank action," and the US may see more of that from the Fed.
US Treasury yields pulled back last week after reaching eight-month highs the week prior. The 10-year yield was last at 0.85%, up 3 basis points from Friday's close.
"So while we can see the fundamentals being positive... bond yields will be capped to the upside," he added. "While we're in that environment, we think maybe it's not quite as bullish, it should be positive, but not perhaps with the not bullish forecasts that are out there."
Instead of diving headfirst into the value trade, Schöwitz recommended investors take a more "targeted" approach and seek out stocks that will be direct beneficiaries of an economic reopening. Travel and retail are two examples, he said.
Schöwitz is the latest analyst on Wall Street to share his outlook on value stocks. After Pfizer's announcement of a highly effective vaccine earlier in November, JPMorgan's quant guru, Marko Kolanovic said value stocks have "greater staying power." Meanwhile, Morgan Stanley's chief equity strategist said that Treasuries "bottomed at the end of August" and signal that an economic recovery supporting value stocks is underway.