“I would now be a little bit more neutral in the sense that a lot of damage has been done” in those categories, Kolanovic said. “There’s definitely good and cheap stuff there, like if you look at the biotech or some international ADR tech companies which are down 50% or 60%, solid companies.”
In terms of what he’d recommend, medium-term in the U.S. Kolanovic likes energy, materials, financials, rising rates, and assets tied to the rising commodity cycle and reopening of the economy. He also likes small caps, noting that their forward price-to-earnings ratios are around 20-year lows -- as well as emerging markets, predicated on the China and commodities themes.
He sees opportunity in differentiation at the single-stock level, noting that many things got sold off about the same amount when some should have dropped more, or less.
“Have a little maybe stock-by-stock analysis to pick up the pieces in this indiscriminate high-beta, high-volatility selloff that was triggered by the Fed,” he said. “Maybe international tech stocks or biotech stocks in the U.S. that, as a theme, you could say have sold off too much. Opposite to these on the negative side would be low-volatility defensive stocks that held up really well -- but these stocks will get hurt by interest rates.”
He also expects volatility and market fragility to decrease in coming months.
“We think now we could be bottoming and the cycle can turn, and we do expect volatility to normalize. Our forecast for VIX is averaging 18, and so if we are at 30 or 26 we think the fair value is lower and VIX should eventually decline,” Kolanovic said. “We saw pretty extreme fragility conditions in January, equal to those during December 2018 and March and April 2020, which, again, the market repricing the Fed was the catalyst. But ultimately we don’t think this is as severe as the pandemic or even that December 2018 selloff. So we are somewhat positive that these things will gradually improve.”
This article was provided by Bloomberg News.