Defensives set to continue leading the market after referendum

The result of the 23 June referendum on the UK's future within the European Union was the 'wildcard' for the short-term performance of equities, but in the medium-term the move lower in sovereign bond yields would continue to constrain 'cyclicals', JP Morgan said.

Markets could be expected to rebound over the short-term in case of Bremain, potentially taking it back to the levels from the beginning of June, when the Euro Stoxx 50 was changing hands at around 3,050.

Eurozone periphery, banks and the UK's domestic cyclicals remained the groups most exposed to the outcome of the vote, Strategist Mislav Matejka said in a research note sent to clients.

Nonetheless, "even if the Brexit tail-risk passes without lasting damage, we think the medium term macro backdrop of subdued, and possibly falling further, bond yields will not alter materially," Matejka said.

That was one of the main drivers behind his "cautious" equity stance in 2016 and fed directly into his sector allocation, together with a poor growth-policy trade-off, the downturn in earnings, stretched valuation multiples and a number of important event risks that lay ahead.

The relative performance between cyclicals and defensives had typically been driven by the direction of bond yields, Matejka said. Indeed, inflation expectations in the latest US University of Michigan survey fell to the lowest on record and five-year inflation forwards in the Eurozone were making new lows, the analyst said.

In the US, utilities and telecommunications were by far the best performing groups year-to-date, he explained.

"We think Defensive leadership is here to stay.

"Discretionary is most at risk, given huge outperformance in the bull market since ’09 and stretched earnings."

Matejka reiterated his 'overweight' stance on Utilities, Real Estate and Telecoms.