JPMORGAN INVESTMENT CHIEF: One type of asset has 'rarely looked better'

Investors in US equities have travelled a rocky road over the last year and have become risk averse in response to rollercoaster prices.

However, in a note to clients seen by Business Insider, the chief investment officer of US equities at JP Morgan Asset Management Paul Quinsee said investors should snap up undervalued stocks perceived as risky.

This is what he said in the note (emphasis ours):

“Unmistakable evidence of risk aversion is everywhere. Companies with the strongest balance sheets sell at a 20% premium to the market, and the weakest more than a 20% discount; both metrics are close to 30-year records. The opportunity to invest in undervalued stocks has rarely looked better.

“If investors were to adopt a less risk-averse mood, if these extremes were to start to reverse, winners could include sectors such as US banks, where the total yield (dividend and buybacks) now looks compelling after favourable stress test results. Many low-priced cyclical stocks (airlines, autos, semiconductors), plus stocks with strong growth prospects in media and healthcare could also benefit.

“More volatile stocks have been utterly out of favour for the past year or so as the market has craved predictability, and many look very attractive from a behavioural finance perspective, such as low-priced biotechnology, airline and refining names.”

The risk aversion Quinsee is talking about has been reported extensively. For example, my colleague Myles Udland outlined this week how Bank of America’s big-money clients hate stocks, and they have been selling since the financial crisis.

In his report, he showed that institutional clients — big mutual funds, hedge funds, pension funds, etc. — have sold about $120 billion worth of stocks over the last eight years.

Quinsee recommends investors take more risk in previously shunned sectors like banking stocks. He added that financial companies are also “despite sluggish earnings growth, increasingly gloomy forecasts for global economic growth and a noticeable apathy towards equities on the part of so many investors” (emphasis ours):

“Meanwhile, financial stocks remain very attractive investments for value focused investors as well. High quality holdings in regional banks, asset managers, and insurance companies look compelling. Although the earnings outlook for many financial stocks has weakened, balance sheets are strong — an important distinction when buying at depressed prices. Attractive and growing dividends are also on offer across many stocks in the financial, industrial and technology sectors.

“For growth investors, the powerful themes driving companies will continue – winners created by disruptive new technologies and secular change across many industries including technology, consumer and industrial businesses.”

This week, some of the world’s biggest banks have reported stellar earnings. Goldman Sachs reported second-quarter earnings that beat on the top and bottom lines. The firm reported earnings per share of $3.72 on revenue of $7.93 billion.

Morgan Stanley also beat the street on Q2 earnings. However, supporting some investors fears of ploughing into banking stocks still, CEO James Gorman warned that results this quarter reflect solid performance in an improved but still fragile environment.”

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