JP Morgan stays at 'overweight' on Eurozone, Japan

JP Morgan stuck by its 'overweight' recommendation on Eurozone and Japanese equities, arguing that the risk-reward trade-off from stocks was still "supportive" and that growth did not necessarily need to shift down sharply, although some stalling was a possibility.

The main risk to stocks in their opinion was that growth might "roll over" and not higher bond yields, pointing to what they perceived as investor complacency on the growth outlook and Cyclicals trading at multi-year highs to back up their case.

Yes, some recent readings on activity had revealed some weakness, with the Chinese purchasing managers' index staging its biggest retreat since 2010, they conceded.

But in many cases the data was coming off historically elevated levels and not all data was coming in softer, with US consumer confidence, initial unemployment claims and the ISM index all recently establishing new cycle highs.

Non-PMI related data out of China had also been relatively healthy, they said.

Furthermore, central bank tightening was still in its early stages and real policy interest rates in the States were still negative.

"The yield curve is flattening, but it is unlikely to get inverted until at least 2H ‘18. Crucially, stocks have never peaked before the yield curve inverted," Mislav Matejka and his team also pointed out.

"We think bond yields should keep repricing higher this year, and our core view is that equities should be able to tolerate rising yields, as we are not yet reaching the yield levels that are detrimental to valuation multiples or to the sustainability of the economic cycle."

In the same research note, JP Morgan stayed at 'underweight' on UK equities, arguing that a further sustained move higher in bond yields might take its toll.

The broker also stayed at 'overweight' on Financials, expressing a preference for Cyclicals over Defensives.