JP Morgan goes underweight global equities for first time since 2007

Entering equities at current levels 'chasing performance' would be "a mistake", strategists at JP Morgan believed.

In their opinion, the market´s 'technicals' appeared overbought and the medium-term upside potential was "limited", justifying their decision to 'underweight' equities in 2016 - for the first time since 2007 - and 'overweight' credit.

The broker´s global equities research team pointed to the proportion of 'bearish' investors and stock market volatility at six-month lows among the signals justifying its caution.

On the economic side of things, JP Morgan said a gap had opened up between Citi´s economic surprise index and the S&P 500.

Furthermore, the results of the most recent manufacturing sector purchasing managers´ indices had come down as seen in the Philly Fed index or in the 'flash' ISM for April.

Over in the Eurozone, PMIs were decelerating and the 'credit impulse' had weakened, the broker said.

Despite the above, earnings per share multiples for the S&P had risen by 8% year-to-date, increasing from 16.4 times to 17.7 times at the time of writing.

Alongside that worsening in P/E multiples, on a price-to-sales basis stocks were more expensive than at any time during the 2007-08 period, JP Morhan pointed out.

The boost to financial markets from the shift in the US central bank´s reaction function, the 'doubling-down' by the European Central Bank and the 'turn' in emerging market central banks´ policies was also now likely past.

Rate-setters at the Fed were no longer injecting liquidity into the system anymore either.

However, the turn in the US dollar might be expected to be an "important positive" for emerging markets, JP Morgan said.

"Rather than chasing the recent rally, we believe that investors should look to fade it," the broker said in a research reprot sent to clients.

Markets were also entering a seasonally-weak period of trading, May and the summer.

By sectors, JP Morgan recommended clients 'overweight' defensives versus cyclicals, including overweights in Telecoms, Utilities and Real Estate.

As regards Telecoms, JP Morgan highlighted how Telecoms CPI was about to move above market CPI for the first time in years.

The sector´s P/E multiple relative to that of cyclicals was also unassuming, with bond yields unlikely to go anywhere soon and the "relative performance" of cyclicals to defensives remained "extremely well correlated to the direction of bond yields".

"We prefer Insurance and Real Estate to Banks (neutral stance)."