Stay defensive with eurozone equities - JPM

The economic activity divergence between the US and the eurozone doesn’t appear to be closing, according to JPMorgan, and thus investors should be wary of buying into a catch-up trade for European equities.

Eurozone equities have been lagging the US again, with the Euro Stoxx 50 index flat over the past six months, while the S&P 500 index has gained 12%. 

“Positioning is light, and valuation spread is widening, with US at 22x forward P/E vs eurozone at 13x, so it might be tempting to look for a catch up trade into year end, especially in light of the latest China stimulus push,” analysts at JPMorgan said in a note dated Oct. 14.

“Despite these, our view is that eurozone equities will keep lagging the US.”

Fundamentally, the renewed widening in growth differential is one of the drivers behind our more cautious eurozone/US stance, the US bank added. 

Eurozone CESI is potentially bottoming, but is continuing to lag US CESI. Both manufacturing and services PMIs in the eurozone are behind US ones, as is the retail sales growth.

“Our economists are looking for 1% real GDP growth in the eurozone over the next few quarters, vs 1.7% in the US,” JPMorgan said.

The relative growth underperformance is likely to translate into continued earnings lag. Both regions currently have negative EPS revisions, but the eurozone is likely to be the weaker one. 

The EPS growth projections for this year in the eurozone continue to be downgraded, and could end up flat, down from what was 5% EPS growth expectation at the start of the year. 

“It is not clear that this will change anytime soon,” the bank added.

The announcements of likely Chinese stimulus over the weekend are helpful, but focus on risk mitigation through reallocation of existing resources, rather than on additional stimulus for consumption or investment. 

Consequently, we continue advising to fade the bounce, for now, and further, trade uncertainty is looming, and could short circuit any improvement in sentiment.

The US bank keeps a defensive tilt in allocation, through overweight positions in eurozone Utilities, Staples, Healthcare, Telecoms and Real Estate

 

Source: Investing.com