JPMorgan says boost your risk positions. And unwind those hedges

[SYDNEY] The Federal Reserve's pause on further tightening, and the chance of a positive surprise from China's economy, have strategists at JPMorgan Chase & Co. beefing up risk-taking positions, cutting cash levels and favoring industrial metals.

The bank's global strategists continue to favor equities relative to bonds, saying in a monthly report that markets are still some way off from fully pricing in less tightening from the Fed. With valuations more supportive, they scrapped hedges that helped cushion performance going into December. They lifted allocations to emerging-market stocks and bonds.

"This decisive dovish shift, to the extent it is sustained, is removing some of the headwinds that caused the 2018 market rout and raises the prospect of 2019 being an asset-reflation year," JPMorgan strategists led by London-based Nikolaos Panigirtzoglou wrote in the Feb. 6 note.

Among the JPMorgan team's new key trades:

Shift away from gold to industrial metals

Favor spread widening in European high yield bonds relative to investment grade, thanks to weaker growth in Europe

Buy a basket of US stocks sensitive to China and trade

Lift credit to neutral from underweight

The group closed some complex hedges, including bets on German and US interest rates, and pared back its underweight recommendation for credit.

Global stocks are already up about 13 per cent since the Christmas-time lows, though the rally is now exhibiting signs of fatigue. Up next is a round of US-China talks in Beijing, with the US delegation led by Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin. The latest round of data shows activity in the Chinese economy is stabilizing in conjunction with signs of progress in the talks, the strategists wrote.

"This dynamic is not only related to a more optimistic view on US-China trade negotiations, but also the possibility that the lagged effects from previous stimulus combined with new stimulus measures will make China look better than last year from a stimulus-traction point of view," they wrote.

BLOOMBERG