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JPMorgan's Kolanovic Says Flight From Momentum Is Just Starting

Lu Wang

(Bloomberg) -- So much economic and geopolitical fear has been built into U.S. equity portfolios that the rotation out of momentum stocks into value is likely to persist for a while, says Marko Kolanovic, the quant guru who foresaw the style reversal just two months ago.

The strategist, who heads JPMorgan Chase & Co.’s macro quantitative and derivatives research, said the rapid shift in preference started Monday with stock pickers closing bearish bets on companies seen as cheaper by measures such as price-to-earnings. Investors fearing a recession have shunned riskier assets and chased winners such as low-volatility stocks, creating a dislocation that Kolanovic called in July an almost unprecedented opportunity in value trade.

Hedge fund managers who drove their equity exposure to cycle lows have done so through raising shorts. Now that the risk involving Brexit and Hong Kong has eased and economic data improved, money managers who missed this year’s equity rebound may want to play catch-up amid a rally that’s likely to last until the U.S and China resume trade talks next month, Kolanovic said.

“Regardless of the outcome of these negotiations, there is a three-week window in September where the market can move higher from record low positioning,” he wrote in a note to clients. “Given record-high gross and near record-low net exposure, the most likely way to increase exposure is by closing shorts. This is the type of move that we saw yesterday and we think it has a lot of room to continue.”

Value stocks saw one of their biggest rallies in recent years Monday relative to momentum in what JPMorgan says represented a 5 standard deviation event, a statistically rare occurrence. Such a swift turnaround is likely to prompt more followers in dumping winners for bargain stocks, according to Kolanovic.

“Yesterday’s move was only started by discretionary” portfolio managers, “and will continue with equity quants (that typically operate at lower frequency, e.g. month-end) and fundamental investors,” he wrote. “We believe that the value rotation can continue and the broad market could move higher going into October negotiations, and if real progress is made, continue into a more sustained rally.”

To contact the reporter on this story: Lu Wang in New York at lwang8@bloomberg.net

To contact the editors responsible for this story: Brad Olesen at bolesen3@bloomberg.net, Richard Richtmyer

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