Shorting too risky, j.p. morgan says

With all the concern around overpriced stocks and possible tightening by the U.S. Federal Reserve later this year, J.P. Morgan says it is getting a lot of questions about shorting risk assets.

The investment bank currently recommends that investors maintain only a five-per-cent overweight rating for stocks in their portfolio. But it does not see a reason to short risk assets just yet, even if there is plenty of uncertainty hovering around the stock market.

“We have been asked frequently since what it would take to actually go underweight risk assets, such as equities, credit, and EM,” J.P. Morgan analysts said in a note to clients. “One should go short risk assets if one foresees a significant rise in macro uncertainty.” The main reason to short the market, J.P. Morgan said, would be if investors expect another global recession. But it doesn’t see enough evidence that a recession is imminent.

“Recessions generally follow economic or financial overheating,” J.P. Morgan analysts said. “Financial assets have been on a tear over the past six years, and U.S. equities are at least as expensive as they were end-2007 by our model, but the leverage into risk assets that defines overheating and creates downside is not prevalent.”

One risk that could potentially warrant shorting is if some of the major global economies are much closer to potential than central banks are currently forecasting. J.P. Morgan noted this is likely the case in the U.S. and U.K., where central banks could begin raising interest rates later this year. It recommends investors underweight stocks and bonds in both countries.

But for the market as a whole, it advises investors to decrease their exposure to stocks to help hedge against the increased risk, saying shorting is simply too risky at the moment.