Investors should buy more government bonds to brace for the likelihood of a recession hitting later this year, JPMorgan’s top equity strategist says. Investors are increasingly deserting defensive positions as more market participants expect a soft landing scenario for the economy. This comes on the heels of a strong start to the year, with the Nasdaq Composite climbing more than 30%, notching its best first half since 1983. But JPMorgan’s Marko Kolanovic said investors are mistaken, and continues to see a year-end recession as his base case outlook. He recommended pivoting to more government bonds to prepare for the risk ahead. “This benign and complacent pricing of recession risk, along with increasing signs that a credit cycle is emerging, makes us turn more negative on corporate bonds and more positive on government bonds,” Kolanovic wrote to clients on Monday. “We therefore trim our allocation to credit by shifting two percentage points away from corporate bonds and into government bonds in our model portfolio,” Kolanovic wrote. In addition, the strategist is encouraging investors to stay defensive in their portfolios, saying he has an overweight allocation to cash and an underweight allocation to equities in his model portfolio. “Risk-reward remains poor in equities in our view, given a decelerating economy with a likely recession starting in 4Q23/1Q24, softening consumer trends (excess Covid savings are expected to be exhausted by October, and restarting student loan repayment becomes a $10Bn/month headwind), rising investor positioning, and the significant re-rating of stocks so far this year,” Kolanovic wrote.
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