The stock market has seen strong gains following the election of US President Donald Trump, but “key positive catalysts are behind us now” as “weaker seasonals approach,” a JPMorgan report stated. In a May 2nd (181 page) Cazenove Equity Strategy Note, analysts Mislav Matejka, Emmanuel Cau, Prabhav Bhadani and Aditi Balachandar map out a global investment strategy as “we might be nearing some profit taking.”
Profit taking near? Goldman and JPMorgan agree
The great bull market that followed the great recession that followed the global financial crisis is getting long in the tooth. The third-longest expansion in US history is at risk of running into recession, Jan Hatzius at Goldman Sachs said in a note recently.
Hatzius finds comrades in JPMorgan’s equity strategy team with this assessment.
For their part, JPMorgan’s Matejka, Cau, Bhadani and Balachandar paint a market environment picture of a constructive mid-term, one where investors should continue to invest in “buy the dips mode” and start to look towards the global economy as “sentiment is getting somewhat complacent.” But one needs to consider the correct moment to enter and exit.
“In the very short term, we think equities will still benefit from continued capitulation and chasing,” as Europe, an underperforming region, is “clearly coming back. However, when markets rise JPMorgan advises investors to “use any further strength over the next weeks as a good opportunity to reduce exposure and lock in some profits.”
Buy the dips but sell the peaks.
“The big picture supports for stocks that we were hoping will drive healthy returns remain in place, but we think that the near-term risk-reward might be getting less exciting,” they wrote with a cautious tone. “Some of the positive catalysts we have been looking for, such as a robust earnings season and the easing in political tail risks, have delivered and are now behind us.”
The JPMorgan Cazenove team warn of “red flags” that are cluttering the investment runway. In addition to falling soft data, the US Citigroup Economic Surprise Index (CESI) has entered negative territory, summer seasonals are negative as well, commodity prices are weaker as manufacturing data “has now rolled over” and “inflation prints could roll over meaningfully,” all amid a political backdrop that remains sketchy. While French problems may be “waning,” issues in Italy are part of a never-ending string of populist political concerns that “could take center stage earlier than consensus.” In fact, “medium term, Italian elections could be the next risk.”
The JPMorgan team offers global investment answers for these and many other vexing issues.
Profit taking – Overweight EU and buy their banks, sell US banks
Framing JPMorgan’s investment advice is the notion that the undervalued Eurozone should be an overweight along with emerging markets, but watch out for a lagging UK and Japan.
Inside the Eurozone, the Cazenove team likes Spain and Germany. “Spanish growth delivery is robust, political backdrop is stable and the banking sector readjusted some time ago,” they said, noting the German DAX stock index is trading near 25-year low price to earnings ratios.
Emerging markets have been outperforming developed stock indexes by 5.8% year-to-date, driven in part by emerging market earnings acceleration and attractive valuations – a 12 times price to earnings ratio, which is a 30% discount to developed market stocks.
From a sector standpoint, they like cyclical stocks over defensives and the US-based bank says European banks are a buy in a pair trade with the US banks, which they recommend selling. US banks “are not cheap” and are facing a flattening yield curve and a slowdown in loan growth while their EU counterparts are seeing accelerating loan growth and trade at attractive price to earnings multiples.
Those political risks in Europe? The JPMorgan “political hedge basket” is expected to rebound as “French political uncertainty wanes,” words that could end up being a Waterloo moment if wrong.