JP Morgan recommends adding to positions in shares

JP Morgan strategists sounded a positive note on the outlook for equities on Tuesday, telling clients the risk-reward balance had not turned medium-term negative.

Rather, they said "we would be adding at these levels".

From a valuation standpoint, relative to bonds that of shares was "undemanding" when compared to fixed income, with the gap versus historical averages still "substantial".

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

Indeed, adjusting for inflation the Fed's policy rates were still negative, and of the last eight downturns in stocks none had ever begun with real rates below 2%.

Neither had stocks ever reached a peak before the government interest rate curve had inverted - something they did not expect to occur until the backhalf of 2018 at the earliest.

From a more fundamental point of view, they admitted that for the most part upgrades to the analyst consensus for companies' earnings per share were now in the rear-view-mirror.

Even so, they believed the first quarter corporate reporting season would be "taken well" and provide support.

The pace of economic growth was also expected to stay above its historical trend, with "no obvious imbalance in the drivers of end-demand which needs to be corrected."

At the end of March, stocks had again become 'oversold', they also noted, with bonds close to turning 'overbought'.

"In contrast, we think bonds are close to being overbought. Investor sentiment is not complacent anymore, with worries ranging from growth to liquidity to valuations. That is a healthy development, in our view."

Lastly, by geographical regions, Italy remained 'top-pick', JP Morgan said, but the strategists recommended staying underweight on the UK.

"US tailwinds fade (Tech, earnings, USD). Italy stays our top pick. Stay UW UK. OW Financials and UW Defensives, apart from continental non-regulated Utilities (OW). Headwinds for Technology sector and Mining are increasing."