Fade post-US election bounce in stocks, JP Morgan says

Strategists at JP Morgan believe the market will shift between a 'reflation' and 'stagflation' mindset but investors should focus instead on the backdrop of rising sovereign bond yields and sell-into the post-election bounce in stocks.

A greater focus on infrastructure spending, together with potential tax cuts, were usually "positive" for economic growth, but the potential hit to business and consumer confidence, as the more uncertain outlook for global trade flows might act as an offset, strategists Mislav Matejka, Emmanual Cau, Prabhav Bhadani and Aditi Balachandar said in a research report sent to clients.

That meant the markets would oscillate between the two mindsets, reflation (higher growth and yields) and stagflation (higher yields but mixed growth outlook), especially if emerging markets "took a back seat".

"Higher yields, stronger USD and the global trade uncertainty do not bode well for the group," they said while reiterating their recommendation to clients to reduce their EM exposure.

That also meant it made more sense to focus on infrastructure spending, instead of on global cyclicals (Capital goods, Technology, Autos) and on 'value' versus 'growth'.

"The relative performance of the two is strongly linked to the direction of bond yields, and the Value style is still much cheaper."

Banks were the most rate-sensitive sector and remained cheap, JP Morgan said, with the broker reiterating its 'overweight' on the group and its 'underweight' on Staples.

"We stick to this view, believing that the Wed-Thu bounce should be faded. Bond yields are strongly breaking out, and this is likely to hurt multiples. EM is starting to roll over and could show some liquidity stress. At the same time, political headline risk is bound to stay elevated as the US policy priorities are formed."