JP Morgan more cautious, downgrades capital goods, lowers overweight on banks

Strategists at JP Morgan expect equity markets to continue to be well-supported over coming weeks but opted to reduce the riskiness, or 'beta', of their portfolio following "dramatic" gains for 'cyclical' stocks in the States and a 29% rise in German stocks over the past twelve months.

To their dramatic second half 2016 gains, US cyclicals had added 510 basis points of outperformance versus 'defensives' year-to-date.

As well, when the Citi Economic Surprise Index falls below zero, cyclicals clearly lag over the following one to three months, they explained.

Cyclicals had also already closed the gap with respect to earnings, which while "great" in the first quarter might in fact soften over the next few months.

"Q1 results were great, as we hoped, but everybody has turned bullish on earnings now, and the bar for Q2 and 2H has been raised materially," they said.

In response to all of the above, JP Morgan downgraded its stance on capital goods and chemicals to 'Underweight' and reiterated its recent downgrade of Technology, noting the rollover in Taiwan orders.

The investment bank also halved its 'Overweight' in banks, saying it continued to like Eurozone and Emerging Market lenders best.

"What to do with Banks? Banks remain the most correlated sector to bond yields and PMIs, and are back to highs in Europe as French risks have fallen. Yields could stay range-bound in coming months as inflation prints roll over and China PPI weakens. These are concerns, and we are cutting our OW in Banks by half, but not exiting completely as the Euro recovery trade is still in the early stages."

On the other hand, JP Morgan upgraded its recommendation on Telecoms to 'Overweight' and that on Staples to 'Neutral' while sticking to an 'Overweight' on Spain.