Sell into any equity strength, says JPMorgan

Several factors will prop up European equities in the near term, although medium-term prospects have worsened and investors should sell into any strength, said JPMorgan Cazenove.

The bank pointed out that the October to January period is traditionally a constructive time for equities.

In addition, it noted that Eurozone activity remains resilient. The German IFO is moving up and Eurozone composite PMI is robust, close to the highest levels since 2011.

“M3 and bank lending data is encouraging, with loan growth to the real economy accelerating. Consumer confidence rebounded, with notably Italian consumer confidence at a 20-year high,” said JPM.

“Resilient data, along with further ECB support, is making the growth-policy trade-off a positive one for the region.”

JPM also said the start of Federal Reserve rate hikes is providing much-needed clarity for markets, while Chinese consumer activity is showing some signs of stabilisation.

Nevertheless, the bank said that for the medium term, the outlook for equities has worsened and recommended investors use any strength as an opportunity to reduce allocations.

At the end of November, JPM cut its equity ‘overweight’ to the smallest it has had in seven years, and reckons it will reduce this again before long.

“Valuations are not attractive any more, balance sheets have deteriorated, credit is sending an important bearish signal, US cycle is getting very long in the tooth and profit margins appear to be peaking,” it said.

It added that while Fed tightening is initially interpreted as a positive, it could in the end be seen as a policy mis-step, especially given the worsening credit into it and flattening yield curves.

“We believe the regime of selling the rallies is upon us.”