Equity Strategy: Eurozone delivering on an improving risk-reward; Sector/style trading around the first ECB cut

Speaker: Mislav Matejka, CFA, Global Head of Equity Strategy

At the overall market level, we remain concerned about the repeat of last summer’s drawdown, inflation staying too hot is a real possibility, market will not like it if bond yields move above 5%. Within this, we have made some regional changes in Q1, specifically we tactically closed our longstanding China bearish view, given 30%+ drawdown in the past 12 months. Also, we have upgraded Eurozone equities last quarter. To be clear, we don’t expect Eurozone to directionally decouple from the US, but it is interesting that in the recent bout of market weakness, S&P500 was down 5-6%, in contrast to EuroStoxx50 down only 3%. We continue to see an improved relative risk-reward for Eurozone equities: 1. Eurozone is trading at 13x forward P/E, vs S&P500 at 20x. In terms of shareholder returns, buybacks yield in Eurozone has moved closer to the US, while dividend yields are remaining double the US. 2. In what is historically atypical, ECB is set to start cutting ahead of the Fed, and by a greater magnitude. At the same time, PMI momentum is improving in Eurozone vs the US, post last year’s reset. 3. Tactically better China performance will help Eurozone vs the US trade, and also UK (OW) and commodities. 4. We have held preference for Growth over Value, for High vs low Quality and for large vs small cap stocks, and we still believe that fundamentally these are right exposures, but do recognize the potential for reversal is very high. Now, the risk of extreme concentration and the momentum unwind is also present in Europe, but it is on a much bigger scale in the US. In the report we address the market, sectors, styles etc. behavior around the first ECB cut in the cycle, which is likely coming up in June. Notably, small caps begin to perform better post the start of ECB cuts.

This podcast was recorded on 28 April 2024.

This communication is provided for information purposes only. Institutional clients can view the related report at https://www.jpmm.com/research/content/GPS-4683726-0 for more information; please visit www.jpmm.com/research/disclosures for important disclosures.

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