JPM further reduces risk going into 2023, sees lows re-tested in Q123

© Reuters. JPM's Kolanovic further reduces risk going into 2023, sees lows re-tested in Q123

By Senad Karaahmetovic

JPMorgan is growing increasingly cautious on equities as we approach 2023 given the rising recession risks. The bank’s top equity strategists see more market weakness next year due to central bank over-tightening.

The strategists further reduced risk, given a weak outlook for markets going into 2023.

"We shift our Equity allocation from OW to a moderate UW, trim risk in Commodities (though maintain a sizable OW) and fund these by increasing our allocation to corporate bonds and cash. Within the Credit portfolio we go OW HG vs HY, and within Commodities we cover our previous UW in precious metals," they wrote in a client note.

The strategists also expect this year's lows to be likely re-tested "early next year," led by a pullback in risk assets. They believe central banks will fuel more market volatility before being "forced to reverse their course."

"Our view is that central banks will likely signal interest rate cuts sometime next year, which will result in a sustained recovery of asset prices by the end of 2023, and subsequently the economy. However, for that pivot to take place, we will first need to see some combination of economic deterioration, an increase in unemployment, market volatility, decline in levels of risky assets, and decline in inflation," they wrote in a note.

This type of environment yields a downside risk in the near term. The strategists see a better environment for stocks in the second half of 2023, at which point markets should start focusing on better economic prospects and corporate fundamentals, and ultimately trade at higher levels.

Until then, the equity market is likely to trade lower from current levels, a view also shared by equity strategists at Morgan Stanley and Bank of America.