JP Morgan says start taking profits, Europe to outperform, stays long commodity equities
Equity strategists at JP Morgan told clients that now might be a good time to start taking profits on the EuroStoxx 50, going on to explain that some of the main drivers of European outperformance were now much more priced in, even if "not by any means exhausted".
Those drivers included an October peak in bond yields, China's reopening and a fall in natural gas prices.
Yet now the focus in financial markets could turn to company earnings, contributing to a "market consolidation" ahead.
Furthermore, their leading indicator, teh rate of growth in M1 money supply was pointing to further softness in purchasing managers' indices.
So too, the disinflation path might not be smooth while US politics and the Fed might send curveballs markets' way.
"Put together, we think the current rally will end up faded as we move through Q1," strategists led by Mislav Matejka said.
"We advise taking some profits, to tactically reduce equity exposure."
Nonetheless, they continued to expect that European equities would outperform and remained long on commodity equities due to the peak in the US dollar, the reopening of the Chinese economy and low inventories.
"We believe that one should start fading the last six months of a Cyclical rebound, and add back to some Defensives that
lagged – such as to Utilities, Healthcare and Telecoms, as bond yields, PMIs and EPS revisions are all more likely to be lower, than higher, in 1H.
"While at some point in 2023 Cyclicals should enjoy sustained bottoming out in PMIs and in EPS revisions, their recent rally could end up looking premature."