JPMorgan’s “neutralizing” US equities.
I’ve never seen the action verb form of “neutral” used quite that way in the context of stocks. It conjures an amusing visual: Equities were becoming dangerously unruly and as such, we had no choice but to neutralize them.
In this case, though, “neutralizing” just means the world’s most important bank is dropping their preference for US shares over European equities.
The bank’s preference for US stocks (versus Europe) dates to May of last year. The decision to close the relative US Overweight comes down to five considerations, the first is just valuations. Europe’s cheap, the US is anything but.
“At 13.3x forward, [the EU] is trading cheap versus the US, which is now on 21x,” Mislav Matejka wrote, in a Monday note, adding that “even if one were to look at sector neutral P/E rating of eurozone versus the US, it is trading the cheapest versus any time pre-COVID.”
The figure above illustrates the valuation point. Matejka also noted that EU shares trade near fair value both compared to their historical median and local bonds, whereas the US is stretched on both scores.
The second factor prompting JPMorgan to drop their preference for the US over Europe is the elevated risk of a correction in frothy momentum stocks. The bank’s sticking with its growth preference (over value), but Matejka cautioned that growth’s already outperformed and “is at risk of a reversal, given the MOMO concentration.” That risk exists in Europe too, he said, but it’s more acute in the US for what I assume are obvious reasons.
Third, JPMorgan suspects Europe’s growth underperformance might be due for a pause. Although the bank’s “skeptical” that any recovery in European economic activity will prove durable, Matejka said “the relative growth disappointments of the region might have peaked.”
Plainly, impediments to growth in Europe abound, but you could certainly argue the US economy’s set for a breather, if not necessarily a recession.
The fourth and fifth factors informing JPMorgan’s newly-neutral view on US versus EU shares are the prospect that the ECB moves to cut rates before the Fed and a potential improvement in China’s fundamentals, which could “indirectly help the eurozone.”
As Matejka wrote, summarizing, “we are neutralizing the US versus eurozone preference, but not reversing.” “The potential for a market drawdown is elevated with Goldilocks fully in the price,” he went on. “If markets weaken from here, the eurozone is very unlikely to outperform, but equally the much more attractive P/E multiples in the region relative to clearly stretched US P/E multiples could offer some cushion, at least in relative terms.”
So, developed market stocks (and maybe EM) might provide a cushion in a U.S. downturn, but no out performance. I’ll take my chances with U.S. stocks until there is a real reason to change horses. No real reason in the past thirty years (trades excepted).
You might have to question your confidence when it becomes clear that Trump will be returned to office.
(For stocks), it is all about how much the US government spends in excess of taxes collected. Both Biden and Trump will be maximizing that amount.
Long US equities.
A good point. But capital markets generally do not welcome political instability and/or surging inflation. Make that stagflation as import taxes are cranked up and the workforce in agriculture, construction and many service businesses is decimated by mass deportations.
Call me crazy, but I don’t think that, if elected, Trump will be as “draconian” on shutting down immigration and deporting immigrants as he is campaigning on.
I say this based on the fact that 1. One can not trust him
2. He did very little to shut down immigration when he was last the US President and the Republicans controlled Congress.
Trump’s closest advisor, Stephen Miller, has been quite public about the plans they have ready to roll out on day one. Including moves to overwhelm immigration advocates.
Will they allow bounties to be placed on those who turn in immigrants? Before you dismiss the idea, look at Texas: Texas passed SB 8, to allow a private right of action for any citizen to bring a civil claim against anyone who aids or abets in the performance or inducement of an abortion.
It won’t only be Latin Americans – Many Asian immigrants smugly say “it won’t impact us because we came legally. Sorry, MAGA bounty hunters just see “Asian” when they look at you.