JP Morgan spies tactical opportunity in euro area equities, upgrades to 'overweight'

Strategists at JP Morgan sounded a tactically confident note on the outlook for euro area equities, citing investor positioning, the valuation discount versus stocks in the States, accelerating money supply growth and increased speculation around a possible fiscal stimulus package.

Funds under management invested in Eurozone shares had decreased by 20% since March 2018 and on a price-to-earnings basis, stocks in the single currency bloc were now "close to outright cheap", Mislav Matejka and Prabhav Bhadani said in a research note sent to clients.

The M1 monetary aggregate for the region had also been improving and it tended to lead Purchasing Managers' Indices by two or three quarters.

"The recent restart of ECB’s QE should bode well in this regard," they added.

And the odds for net fiscal stimulus were rising, they said, noting how on the three occasions that it had been implemented during the current economic cycle, equities in the bloc had risen strongly.

So on a tactical basis, JP Morgan upgraded its recommendation for Eurozone shares to 'overweight' funding with the US, which it downgraded to 'neutral'.

"Given the current activity weakness, Brexit and trade uncertainty, and the mounting political pressures on core Europe from anti-establishment, we think that it might not take much for some encouraging news on this front.

"After all, Eurozone fiscal leverage and primary surplus are far better than in the other main regions."

On the flip-side, the Italian 2020 budget negotiations were a potential source of volatility and there were some clear risks to their call - such as as Brexit.

"Here, No-deal crash out of EU is not our base case, at least not until after the early elections happen, potentially taking place in late Nov/early December. Another possibility one should not dismiss is that Boris Johnson does get a deal through before October 31st deadline.

"This would clearly be very bullish for UK domestics in GBP terms, and would significantly help our Eurozone upgrade."