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Strategist Who Called Time On Bull Market Upgrades Stocks

Joanna Ossinger
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Strategist Who Called Time On Bull Market Upgrades Stocks

(Bloomberg) -- It’s time to stop shunning stocks, according to Deutsche Bank AG strategist Binky Chadha, who joins a number of market participants turning more bullish after the recent battering.

Chadha, who called the S&P 500 Index’s furious run higher in 2019, then pivoted to forecast no gain at all in 2020 before the coronavirus crisis hit, boosted his equity allocation to neutral from underweight, according to a note Wednesday.

He cites equities’ peak-to-bottom decline now being in line with the historical pattern and positioning at a record low among the main reasons for his shift. Earlier this month, Chadha’s base case had been a 15% to 20% decline from the last peak. By the close on Monday, the S&P 500 had plunged 34% from its February record.

“We have been underweight equities and defensively positioned for some time on the view that equities were expensive and pricing in too strong a rebound in growth,” Chadha said. “With equities already pricing in our baseline expected decline in activity and positioning low, we move our equity allocation from underweight to neutral.”

The second-quarter crevasse in activity and earnings is well priced into equities, but less so in rates and least in credit, he wrote. While the S&P 500 just completed its first two consecutive days of gains since mid-February, the gauge is still down 27% from its Feb. 19 closing record high. Futures on the index were down 0.7% as of 8:57 a.m. in New York on Thursday. U.S. stocks are pricing in an ISM Manufacturing number of about 34 and earnings growth of minus 23%, Chadha said.

Credit Suisse Investment Committee and BlackRock Investment Institute are also veering toward more bullish stances in equities.

Credit Suisse moved to a “small overweight” in developed market equities as it became more confident policy actions from central banks and governments would be able to limit the economic fallout from the crisis to a sharp but temporary contraction, followed by a recovery later in the year.

“In light of the announced U.S. stimulus package, we think that the risk of a very bad economic outcome has come down significantly,” strategists and economists including Global Chief Investment Officer Michael Strobaek said in a report.

Similarly, BlackRock Investment Institute said it favors rebalancing toward broad asset class benchmark weights to regain an overall neutral stance. Once the scale and impact of the outbreak becomes better understood, the policy response would pave the way for an eventual and strong economic and market rebound, it said in a report emailed Thursday.

Deutsche Bank’s Chadha noted that funds have de-levered across the board from both long and short sides due to high volatility. In January, he had issued a caution on the equity rally due to a scenario he saw as stretched. The collapse in positioning to record lows is “broad based but led by the systematic strategies as both vol and trend signals deteriorated sharply,” he said.

His shift comes as the bank forecasts a sharp economic rebound in the third quarter. The outlook for stocks is “all about Q3,” Chadha said.

(Adds futures in fifth paragraph.)

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