JP Morgan does not expect bounce in stocks to continue, FTSE 100 to outperform

JP Morgan cautioned clients it did not expect a sustainable rally in global stocks like the one seen between February and April, pointing to a host of reasons to back up its assessment, advising investors to remain focused on those stocks which stood to benefit from falling sovereign bond yields.

On a brighter note, on a currency-hedged basis it continued to expect UK to outperform and said it remained 'overweight' emerging market stocks versus those from developed markets.

One reason put forward by strategist Mislav Matejka to back up his thesis were the still poor 'market internals', with 'defensive' issues having led gains both on the days when the broader market rose as well as on those when it retreated.

Furthermore, speculators continued to be net long in S&P 500 futures, he said, and retail positioning was "light".

That came alongisde yield curves at their flattest in eight years.

"Our key strategy for 2016 remains to 'overweight' defensives. We would use any short term bounces in cyclicals to reduce," he said in a research report sent to clients on 4 July.

"Regionally, we believe FTSE 100 will remain a surprise outperformer, currency hedged.

"Stay long FTSE 100 versus FTSE 250. Emerging markets (EM) to continue outperforming developed markets (DM), especially given that EM Bond Index (EMBI) yields are moving lower, and USD is not appreciating versus many key EM crosses."

From a sector standpoint, Matejka said his top picks for the year remained: utilities, real estate excluding the UK, telecoms, healthcare and energy.

On the macroeconomic side of things, whereas the consensus was expecting US gross domestic product to expand at a 2.0% clip over the back half of 2015, the most recent business expectations with the US services sector purchasing managers´ index was at its lowest on record, he said.

Chinese PMIs were also unwinding the bounce seen during the first three months of the year.

Furthermore, he added: "Political uncertainty is bound to linger, with elevated headline newsflow risk. Perversely, if the initial fallout from the UK decision does not end up being too negative, this might embolden other parties to follow suit."