JP Morgan prefers French stocks over Continental peers because of lower China exposure

Bank shares in the Eurozone might be set to recover some of the value relative to their US-listed peers which they had surrendered year-to-date, strategists at JP Morgan said.

Thus far in 2016, stocks in the space were nursing losses of approximately 15% but the US central bank´s decision to open the door to interest rate hikes might lead to some of those losses being unwound, strategists Mislav Matejka, Emmanuel Cau, Prabhav Bhadani and Aditi Balachandar said in a research note sent to clients.

However, "we would not overstay our welcome in this trade, though, beyond a short-term reversal," Matejka and his team went on to explain..

"Our past work shows that Eurozone tended to trade poorly against the backdrop of falling global equities, something we think we are likely to return to during 2H."

Looking to the medium-term, Matejka pointed out how the yield curve was continuing to flatten and inflation 'forwards' might stay subdued.

"For Banks to perform sustainably, bond yields need to move higher, which might be difficult to achieve unless growth rebounds," he said.

Acting as a backdrop, euro area shares had underperformed US stocks by 8% year-to-date, with relative price-to-earnings multiples now "on the cheap side of 'fair value'", the strategist said.

Nevertheless, economic momentum appeared relatively stronger in the Eurozone relative to the States and the European Central bank was embarking on a wider programme of asset purchases, in contrast to the Federal Reserve, the strategist added.

By countries, JP Morgan expressed a preference for France, because it was not overly dependent on a rebound in China, and Spain, placing an 'overweight' recommendation on stocks in both.

Still in the periphery, but outside of the banks space, Matejka highlighted how so-called 'peripherals' were trading at a 30% discount to their historical levels in terms of their price-to-book multiples.

As well, over the past few years Spanish stocks had taken a beating due to their exposure to Brazil and the rest of Latin America, but stability in asset prices from the region was helpful and, in their opinion, the upcoming re-elections in Spain would not add to the uncertain environment.

"There could be a push to form a limited mandate government and move on," Matejka said.

However, at the pan-European level their favourite geography in 2016 was the UK.