JPMorgan reiterates call to cut equity exposure after ECB

JPMorgan Cazenove reiterated its call for investors to start fading the bounce in equity markets, saying they should use the announcement of additional stimulus by the European Central Bank as an opportunity to cut exposure.

The bank said the central bank’s latest package was far from a game changer.

It said the ECB tried to put last December’s disappointment behind it by moving deeper into negative rates territory, offering four additional TLTROs and increasing the pace and scope of asset purchases.

However, JPM said “the forward inflation targets were downgraded substantially, ECB didn’t address the issue of capacity constraints, and the shift in focus away from facilitating further currency depreciation will, in our view, end up being a negative for region’s equity market”.

JPM argued that equity markets typically struggle to perform in the backdrop of negative interest rates, giving the example of Switzerland, Japan, Sweden and Denmark, where the impact on economic activity was muted, with no boost to consumer confidence.

On the upside, however, it said the ECB’s decision to start buying corporate debt will likely result in significant and sustained spread compression, as was the case in Japan, which should be a big help to the insurance sector, on which it reiterated its ‘overweight’ stance.

JPM noted banks have performed better recently and the ECB’s measures could help the sector’s earnings by a few percentage points from the funding side, but broader pressures are unlikely to lift.

The bank used this opportunity to cut its stance on the sector to ‘neutral’ from ‘overweight’ and maintained a preference for the periphery over the core.

It upgraded real estate to ‘overweight’ from ‘neutral’ as the sector is likely to benefit from a continued low bond yield regime and corporate debt buying. It also upped healthcare to ‘overweight’ from ‘neutral’ given a poor performance year-to-date and cheap valuations.