(Bloomberg). Marko Kolanovic has two reasons to be confident in his bullish stocks. The first is 2022. Even though the financial market had a rough start with increasing inflation and Russia-Ukraine tensions, it’s still a good year.

The co-head of global research at JPMorgan Chase & Co. (NYSE:) has been asserting for some time that investors should buy dips in stocks — but now he sees the acute pandemic phase of Covid nearing an end and better times ahead from China, which he expects to offset Federal Reserve tightening. As these developments occur, he believes there is potential for large rotations in equity markets.

“Our base case is the end of the pandemic completely,” Kolanovic said in an interview. “During the spring and summer we will have a very strong recovery because omicron is in fast decline and now the immunity rates are really, really high.”

He added that when looking at pandemics in the last century, they lasted about two years and maybe three to four waves, “and then for the next 10 to 20 years nothing. We think we’re basically at that point, two-plus years of pandemic, we’ve had the four major waves. And so we think now maybe we’ll be fine for the next 10 or 20 years.”

He said that China’s improvement should help to brighten the world in the coming months.

“We think China is making a significant inflection point in terms of stimulating their economy, via both monetary and fiscal policy,” Kolanovic said. “We also expect or hope on the regulatory side some easing of regulatory pressure.”

JPMorgan was named top global research firm and number-one equity research team in Institutional Investors’ survey results released last month, after already having been awarded number-one global fixed income research team. Kolanovic was named co-head for global research alongside Hussein Malik last September. Kolanovic continues to share research regularly with his colleagues. In recent weeks he’s said that bond traders are overpricing a hawkish Fed, and that recession fears are overdone in small-cap stocks, for instance. He advocated for buying the dip in equity, shortly after the discovery of the omicron. This was because data suggests that the variant might be less fatal than the other.

Still, Kolanovic doesn’t necessarily see an easy path for investors this year.

“You add the geopolitical friction points like Ukraine, and you can really produce some large moves which we think could still play going forward,” he said. “Everyone’s talking about Russia and Ukraine and it’s a very idiosyncratic thing. However, it’s crucially linked to oil, natural gas, and global energy security. It is important to have exposure to the energy sector by country, as well. Perhaps Russia is not the right place to invest, but maybe some of the countries that are proxies for commodities, we like that as well.”

About a year ago, Kolanovic said in the interview, he was bearish on the categories of innovation, clean energy, special-purpose acquisition companies (SPACs), crypto, and Covid beneficiaries — and said now that they’re now all down by around half from that point, he’s less bearish. 

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“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. Kolanovic also enjoys small cap stocks, noting their forward prices-to-earnings ratios at 20 year lows. He also recommends emerging markets, which are based on China and commodity themes.

Continue reading: China Small Caps may Stand Out Among Dim Outlooks, BofA Says

He thinks there’s potential in differentiation at the one-stock level. Noting that many products were being sold for about the same price, even though some items should have fallen more or less, he believes this is an opportunity to differentiate.

“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.”

In the coming months, he expects market volatility to decline.

“We think now we could be bottoming and the cycle can turn, and we do expect volatility to normalize. Our forecast for 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.”

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