- S&P 500 2.5-times overvalued, analysts say
- Diversification via consumer staples and real estate
- Short oil is a bet on a slowing economy
Just over a month ago analysts at investment bank JPMorgan called stock markets ‘overvalued’ based on current interest rates. Since then, the Fed has doled out another quarter point rate hike (in March) and the S&P 500 has risen nearly 4%.
If JPMorgan’s assessment at the time (28 Feb) was that the ‘risk-reward for equities remains poor’, it must have got worse since.
JPMorgan’s Marko Kolanovic says history implies that at current levels that S&P 500 is about 2.5-times overvalued amid a vulnerability in corporate profits.
Such a steep overvaluation comes at a time when companies are facing margin pressure from higher interest rates, due to higher cost of capital, demand destruction for certain goods, and potential asset write-downs and credit losses.
That's a bad combination for stock prices.
FTSE 100 CLOSE TO ALL-TIME HIGHS
The S&P 500 may be more than 13% off record peaks of January 2021, but not so the FTSE 100. The UK’s benchmark has been blazing a trail higher this year, hitting an all-time high 8,014.31 in February, albeit its post-Covid bounce-back has been very slow.
For investors that feel equity valuations are toppy, Morgan Stanley analysts have some interesting ways to bolster your portfolio defences; go long on consumer staples and real estate stocks and go short oil.
BET ON STAPLES AND PROPERTY AND AGAINST OIL
‘Consumer staples companies make and sell essential goods that folks buy every single day, like food and beverages, personal care products, healthcare items,and tobacco products.’ Because shoppers tend to buy those products no matter what’s happening in the economy, such stocks can work as defensive plays, said Morgan Stanley’s analysts.
Real estate tends to be a cyclical sector, so it’s far from surprising that the trade has relatively poor correlation scores and may not work reliably if stock markets tank. But since real estate stocks have corrected a lot already, the sector is now scoring positively when it comes to valuation, believes Morgan Stanley.
A strong economy tends to push up demand for oil, and the price of the slippery stuff usually rises as a result. So shorting Brent - one of two major oil benchmarks - is essentially a bet that the economy will slow down.
‘Because oil prices tend to move significantly, the trade could provide a high-octane hedge if sentiment turns sour,’ argues Morgan Stanley.
