European equities will close up into year-end, says JPMorgan

Now that European equities have re-tested the year-to-date lows seen in August, JPMorgan Cazenove said investors should still be looking for stocks to close higher into year-end.

In its recent equity strategy note, the bank said: ““We think that market will be higher into year-end, partly helped by the improving seasonals. We reiterate our recent upgrade of commodities – shorts are at record highs and Fed has turned more dovish. We continue to advocate domestic recovery plays.”

JPM said said although investors remain worried about the lack of clarity from policymakers, continued slowing in emerging market growth, rising credit risk and the fallout from the Volkswagen scandal, there are reasons to be optimistic.

JPM pointed out that Eurozone PMIs are are pointing to an ongoing recovery, noting that the new business subcomponent of the latest flash PMIs hit 5-month highs.

In addition, the bank said it expects Chinese near-term growth momentum to pick up. “House prices and retail sales are already showing better trajectory over the past few months. The infrastructure orders are likely to accelerate into year-end as the central government ensures that regional budgets for the year are used up,” it said.

Aside from fiscal stimulus, JPM expects more on the monetary front, with the lowering of policy rates and cuts to the reserve requirement ratio.

The bank argued that Eurozone earnings are resilient so far this year, which is a big difference to the experience over the last four years, when earnings growth always ended negative. “Current levels of PMIs are consistent with sustained double-digit EPS growth.”

JPM said equity valuations have de-rated sharply and Eurozone equities have moved to their lowest multiple since October 2014.

As far the VW scandal is concerned, it said the magnitude of its impact on the auto sector and the entire supply chain is unclear. Potentially weaker pricing and lower diesel demand could follow, it said.