Investing.com - JPMorgan remains cautious over eurozone equities, preferring to stay exposed to the UK in Europe.
The main indices on Wall Street reached all-time highs in the wake of the Federal Reserve’s hefty interest rate cut, but in Europe the benchmark Euro Stoxx 50 index has failed to make ground ever since March, JPMorgan noted.
“Even as eurozone valuations are undemanding, trading at 12.8x forward P/E, we keep our cautious stance on the region, still think it will lag relative to the US,” analysts at JPMorgan said, in a note dated Sept. 23.
“In a nutshell, the eurozone is a Cyclical Value play leveraged to China.”
Cyclicals have performed poorly over the past months, with Autos, Luxury, Mining, Semis, etc. all down 20%, the bank added, “but we remain bearish on Cyclicals, expecting further downside in bond yields, due to negative EPS revisions and still unattractive valuations.
Encouragingly, it said, the gap with PMIs has closed, and Cyclicals tended to start rallying 4-6 months post the start of Fed cuts in a soft landing scenario, so early next year could be an opportunity to pick up some Cyclicals.
JPMorgan remains cautious on the China economy, which is typically a problem for eurozone equities. That said, the China market has already repriced back lower, and the stimulus hopes are rising again, which could be a help down the line.
“The headwind for euro equities is the poor earnings delivery, with continued downgrades. This is in addition to activity momentum which has stalled again - last week the ZEW survey fell to a fresh low for the year, and the PMIs remain well below the levels that were historically consistent with positive EPS revisions. Potential trade and tariffs risks do not help,” the US bank added.
Within Europe, the UK remains the bank’s overweight, “and we note that UK is the best-performing market globally in the past 6 months, in USD terms at +11% even better than the US, while the Euro Stoxx 50 is down 2% over that time frame.”
“UK valuations remain very attractive, with P/E at 11.5x, and fully covered dividend yield at 4.0%, topping other key markets. Political backdrop is more supportive, with less policy paralysis, and the defensive sector leadership that was in force in the past months in particular helps the UK market, which typically trades as a low beta,” JPMorgan added.