JPMorgan strategist who nailed the reopen trade says it's time to get defensive again

Published Mon, Jun 29 202012:49 PM EDT

(This story is only for CNBC Pro subscribers ) The JPMorgan equity strategist who predicted the reopening trade is now telling clients it's time to take a more defensive tilt to the portfolio. The brokerage said in a note published Monday that while it may have been a good move in April to snap up stocks sensitive to the health of the U.S. economy, it's now time to pick up more resilient names in staples, utilities and technology. Mislav Matejka, JPMorgan's head of global and European equity strategy, highlighted those sectors as rife with good deals given both historically low interest rates and stronger earnings outlook in an economy dogged by the Covid-19 outbreak. He added that the cyclical names that outperformed the S & P 500 in May — such as travel and construction stocks — can only improve with a sustained expansion in manufacturing activity. And that, Matejka said, looks uncertain given the spread of Covid-19. "From here, for Cyclicals to lead for longer, we believe that one needs to see PMIs breaking out into expansion territory. We worry that this is unlikely to happen as labour markets are expected to stay weak in 2H, constraining the consumer rebound," the JPMorgan strategist wrote. "We find Defensive sectors, plus Technology, far from expensive, and think they are in fact still attractively priced," he added. Matejka argued that those sectors look cheap and explained that the price-to-earnings ratios of pharmaceuticals, utilities and staples stocks are at 10-year lows versus the broader stock market. Technology, while not as undervalued, "looks fair value" and is forecast to deliver more consistent income, balance sheet stability and cash flow. Bonds yields, currently at or near record lows in the U.S., should remain capped amid a glut of government debt around the world, JPMorgan wrote. That, too, bodes well for staples and utilities stocks, which investors tend to favor for their stable dividends as a fixed-income play. Strategists flock to names like McDonald's , Verizon and Entergy for their quarterly payouts when viable alternatives, like long-term Treasury rates, aren't as lucrative. U.S. 10-year note yield, a benchmark for rates throughout the U.S., hit a low of 0.628% on Monday, its lowest level since May 22. Meanwhile, tech is "clearly not stretched as it was in '01- '02," Matejka wrote. "One needs to see the earnings for the rest of the market rebound aggressively vs Pharma/Staples/Tech in order for the P/E discount not to lead to the outperformance of the latter." In normal times, investors like tech stocks not for hefty dividends per se, but for their ability to post earnings even if the economy is lackluster. Companies like Apple, Nvidia or IBM can, in general, better weather an economic downturn than airline or cruise companies that depend in part on Americans' willingness to splurge on a vacation. That's also why JPMorgan's Matejka favors shares of staples companies, or those that produce goods most Americans deem necessary to their everyday lives. Those companies, which include Campbell Soup , Procter & Gamble and General Mills , also tend to hold up better than the broader market during turbulence. "Our economists forecast that the worst of the labour market weakness is likely behind us; however, the projected path is far from a V-shaped recovery," Matejka wrote. "We believe that as labour weakness lingers, the consumer activity could be more subdued than hoped for."

Can of Campbell's soup are displayed on a shelf at a grocery store on June 05, 2019 in Richmond, California.

Justin Sullivan | Getty Images

(This story is only for CNBC Pro subscribers)

The JPMorgan equity strategist who predicted the reopening trade is now telling clients it's time to take a more defensive tilt to the portfolio.

The brokerage said in a note published Monday that while it may have been a good move in April to snap up stocks sensitive to the health of the U.S. economy, it's now time to pick up more resilient names in staples, utilities and technology.