- Inflation is an underappreciated risk, a team led by JPMorgan's Marko Kolanovic said Monday.
- The strategists reiterated their call to stay overweight cyclical assets that hinge on the economic recovery.
- Despite inflation risks, Kolanovic has a bullish outlook on the stock market for the rest of the year.
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Investors are still underestimating the risk of inflation, JPMorgan's quant-driven chief global markets strategist said.
In a Monday note, a team led by Marko Kolanovic reiterated their recommendation to stay overweight in assets pegged to the economic recovery, and noted that inflation surprises are likely to persist throughout the second half of 2021.
"In our opinion, inflation risks are underappreciated by both economists and markets at the moment," said the strategists. "At an asset class level, the inflation theme does not only favor an overweight in commodities and equities, but also an underweight in credit."
They added that value stocks and value-oriented sectors should continue to outperform, while tech stocks may lag if rates rise.
Rising inflation has been a central concern on Wall Street as the economy rebounds out of the pandemic. Last week, BlackRock's Gargi Chaudhuri said that while she doesn't expect runaway inflation of the 1970's, higher inflation is an underpriced risk.
Despite inflation risks, Kolanovic's team has a bullish outlook on the stock market for the rest of the year.
The strategists cited the ongoing recovery from the pandemic, accommodative monetary stance from global central banks, and still-below average positioning in risky asset classes such as stocks and commodities as reasons for their pro-risk view.
"The next leg higher is likely upon us, following the sideways move in markets and bond yields over the past two months, with cyclicals expected to do better again vs defensives," they said. "Despite peaking in some activity indicators, the market is likely to get comfortable that growth will remain significantly above trend in 2H, supported by both consumer and capex. Regionally, our strategists expect the outperformance of Eurozone, Japan and EM, while they are underweight US and UK stocks."