Market growth barriers likely to fade, JP Morgan says

Investors are showing healthy wariness about markets but barriers to growth are likely to recede after a recent retrenchment, JP Morgan said.

The reasons for market weakness are mainly technical but also fundamental, JP Morgan said in a strategy note.

Technically, concerns over froth from liquidity spilling into financial markets have been building for a while and tactical indicators have been stretched but these are stabilising, JP Morgan's Mislav Matejka said. The short squeeze appears well advanced and a Vix index spike like last week's always precedes rising over one and six months outside recessions, he said.

Fundamentally a stronger dollar, stalling bond yield and mixed earnings reaction are obstacles, while China credit impulse is peaking, Matejka said. Shares still need to work through the third virus wave and lockdowns and the market has been absorbing the most challenging reaction to earnings in years.

But the market is closer to looking through most of these problems to concentrate on the likelihood of activity picking up again in March-to-April, Matejka said.

"The recent retracement in broad stock indices, to a large extent driven by technical distortions, is making investors worry that there could be more sustained losses in store, and there is a healthy skepticism toward the chorus of pundits who immediately declared a buying opportunity," Matejka wrote in a note to clients. "While there are likely fundamental, and not only technical, drivers behind the weakness, which could linger, we believe that these roadblocks might not be in position for long."

Matejka kept his 'overweight' rating on emerging markets, the eurozone and Japan. Having been overweight on the US the bank took profits after a strong run. In the UK valuations look very attractive after a poor tun and the country is rated 'neutral', JP Morgan said.

"Having said that, UK is not a value play, and while it might not lag so dramatically anymore, it is unlikely to be an outperformer," Matejka said. "UK was behind other markets in every single value rally seen in the past 10 years … Within the UK, we believe certain domestic plays, such as homebuilders, banks and utilities, are still attractive. We were very bullish on miners, but are tactically taking profits on the group."

Value shares will show further gains in 2021 after a weak couple of months from an extremely low starting point, the bank said.

"We believe the stalling in value seen over the past two months is healthy, the froth has been taken out, and this might lead to a better entry point," Matejka said.