Equity Research
Equity Strategy : Time is coming to position for the long duration trade
October 8, 2023
Equity Strategy : Time is coming to position for the long duration trade
Equity Strategy : Time is coming to position for the long duration trade
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Equity Strategy

Time is coming to position for the long duration trade

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  • Bond yields have been moving up strongly, pricing in the higher for longer stance by the Fed, as well as the deteriorating demand-supply balance, among other things. Many suggest that the July-Sept upmove in oil prices should mean further bond yields rally, as inflation could increase again.
  • We do not subscribe to this view and believe that we are currently in a transition phase, rising bond yields at these levels are problematic for investor sentiment and for the economy, and are therefore ultimately not sustainable. Bond RSIs are becoming oversold, and could start pricing in a policy mistake, where bond yields are likely to start to move lower.
  • Brent rally does mechanically imply that PPIs, as well as CPIs, could inflect higher again, and we note that historically oil and bond yields were most of the time positively correlated. Having said that, unlike 2021-2022 episode, where bond yields and oil were moving up together in order to reflect the economies reopening, and where the consumer at the time was accepting of rising prices, given pent-up demand and a strong post Covid liquidity position, the recent oil rally was mostly for supply reasons. This could lead to demand destruction, and be deflationary, rather than inflationary.
  • Further, looking at the past eight Fed tightening cycles, post the final hike, bond yields were down each time, by 100bp on average, irrespective of whether the recession or the soft landing followed. We acknowledge that US fiscal deficit is significant, with deteriorating supply-demand picture for government bonds, but yields are at present trading much above the inflation forwards, and above the levels of economic activity, with growth at risk of softening post the strong Q3 prints.
  • If bond yields roll over, will it help equity valuations? Not if yields are peaking at the time when earnings, and the broader economy, start to disappoint. Equity-bond yield gaps show that only Japan is displaying attractive cross asset valuations, at this stage – we stay cautious.
  • In terms of sector leadership, we note that post the last Fed hike, the sector tilts would turn broadly Defensive, on a 6-12 month horizon, in both the US and in Europe, with Insurance, Staples and Utilities ahead. Defensive valuations are not outright attractive, but appear better than a year ago, and will offer earnings safety in the event of a potential weakening in operating leverage, and the pricing, for the broader market.
  • If the above materializes, the implication, apart from the likely Defensives rebound, would be to go UW Banks. After being OW European Banks in 2021 and 2022, we have entered this year Neutral on the sector. Banks are well-capitalized, show strong earnings trends, and have been the best performer in Europe over the last 6 months, given the higher for longer narrative, but could start to lag if/when bond yields peak out, especially if their NII income rolls, along with the potential credit backdrop worsening. Within the sector, we continue to prefer Japanese to US and to European Banks, and think pair trade of OW Insurance vs Banks could be attractive.

Even taking out Tech impact, equal weighted SPX, which is down 1% ytd, is still showing a gap with real yields…

…the bond yields move is ultimately unsustainable… post the final Fed hike, yields always fell over the next year…

…the sector leadership was clearly long duration in that phase

Source: Datastream, J.P. Morgan, Bloomberg Finance L.P.

 

Anamil Kochar (anamil.kochar@jpmchase.com) of J.P. Morgan India Private Limited is a co-author of this report

Time is coming to position for the long duration trade

Figure 1: US 10Y bond yield

Source: Bloomberg Finance L.P.

There has been a significant repricing in the bond markets since the spring, with US 10-year up 150bp. This was initially driven by the more favourable growth outlook, but more recently by the less supportive demand-supply balance for fixed income, as well as the adjustment to the higher for longer Fed.

Table 1: Move in different regional 10Y bond yields post SVB troughs

10Y BYCurrentMove post SVB trough to current, bpsHighest since
US4.83%153Aug-07
Euro Area2.94%83Jul-11
UK4.62%161Oct-08
Japan0.81%56Aug-13

Source: Bloomberg Finance L.P.

Indeed, US 10-year yields are now the highest since 2007, and other markets are also making multi-year highs.

Figure 2: US 30Y Mortgage rate

Source: Bloomberg Finance L.P.

Since August, equities are not responding well to this, and the risk is that the tightening in financial conditions spills over into the real economy. Markets could start to discount the possibility of a policy mistake, where central banks overstay their welcome. US mortgage rates are now at two-decade highs.

Figure 3: US 10Y bond RSI

Source: Bloomberg Finance L.P.

Tactically, bonds RSI is close to getting oversold.

Table 2: Key regions 10Y Government bond yield forecast

10 YrForecast for end of
Govt BY6-Oct-23Dec 23Mar 24Jun 24Sep 24
US4.834.204.053.903.80
Euro Area2.942.202.001.901.80
UK4.624.304.053.903.75
Japan0.810.750.800.901.00

Source: JPMorgan, Bloomberg Finance L.P.

We think the recent move up in bond yields is a bit of a capitulation trade, and during Q4 the levels would be very attractive to lock in higher yields. The move up in bond yields might not be sustainable, our fixed income team is looking for yields to fall from current levels in most places.

Does the July-Sept upmove in oil mean further bond yields upside? Not in our view

Figure 4: Brent ytd

Source: Bloomberg Finance L.P.

Oil prices have weakened of late, and their initial upmove since July could be largely attributed to supply constraints.

Figure 5: Crude oil inventory

Source: Bloomberg Finance L.P.

Indeed, oil inventories are very low at present.

Figure 6: US headline PPI vs Brent

Source: Bloomberg Finance L.P., J.P. Morgan

Even though mechanically the move up in oil will lead to higher PPIs and CPIs, we do not think that should drive another leg up in bond yields.

Figure 7: Brent vs US 10Y bond yields

Source: Bloomberg Finance L.P., J.P. Morgan forecasts

Typically, bond yields and oil prices are positively correlated, as they tend to directionally reflect the economic outlook. In 2021 and 2022, both moved up smartly on reopening and economic normalization. As the pent-up demand is largely exhausted, along with excess liquidity, any move up in oil price from here might not be inflationary, but deflationary, as it is supply driven, and could lead to demand destruction.

Figure 8: Brent 12m rolling correlation to US10Y bond yield

Source: Bloomberg Finance L.P.

The correlation between oil prices and bond yields is mostly positive, but tends to flip in the runup to recessions.

Table 3: OPEC+ announced Oil supply cuts

Date of AnnouncementStart of the cutSize of the cut (kbd)Announcement
05-May-22Nov-22-2000OPEC+ to adjust downward overall production by 2 mbd from the August 2022 required production levels
02-Apr-23May-23-1660Voluntary production cut of 1.16 mbd by eight OPEC+ members, Russia to cut 500 kbd
04-Jun-23Jul-23-1000Adjustment to 2024 production quotas, Sauda Arabia introduces additional voluntary cut of 1 mbd
05-Jun-23Aug-23-1520Saudi Arabia to extend voluntary 1 mbd cut into August, Russia to reduce exports by 500 kbd and Algeria to voluntary cut 20 kbd in August
04-Aug-23Sep-23-1300Saudi Arabia to extend voluntary 1 mbd cut into September, Russia to reduce exports by 300 kbd in September
05-Sep-23Oct-23-1300Saudi Arabia to extend voluntary 1 mbd cut for the rest of 2023, Russia to reduce exports by 300 kbd for the rest of 2023

Source: J.P. Morgan Commodities Research

Combined, the OPEC+ alliance is holding back more than 4 mbd from the market, which is the highest level of cuts outside of recessions over the last two decades. If the oil price stays elevated on the back of this, bond yields are unlikely to move up.

Figure 9: US Gasoline demand

Source: J.P. Morgan. Commodities Research

US gasoline demand has tracked below average seasonality for a few months now.

Looking at the past Fed tightening cycles, bond yields always peaked post the final hike…

The Fed is likely at, or approaching, the final hike in the cycle.

Figure 10: US 10Y bond yield move around last Fed hikes in the cycle

US 10Y bond yield move (bps)
Aug 84Sep 87Feb 89Feb 95Mar 97May 00Jun 06Dec 18AverageMedian
-12m100214118192528012229113109
-11m9720087138235092108789
-10m10020161721176103-127674
-9m972321762-134690-106554
-8m792164954-85363-166153
-7m96207283413672-305535
-6m6921845574784-145951
-5m71754249231268-84632
-4m-148257663-2664-112831
-3m-867630-2442-1239-3149
-2m-11310034-27141814-44014
-1m-765144-16375715-311026
Fed last hike
1m-13294-4418-45-203-9-5
2m-66-41-23-46-2-33-42-12-33-37
3m-125-33-76-60-32-59-57-14-57-58
4m-127-50-114-146-58-58-52-20-78-58
5m-116-102-135-146-38-69-67-36-89-86
6m-100-101-120-119-64-76-49-73-88-88
7m-81-63-117-143-78-124-30-70-88-80
8m-144-37-151-148-91-119-63-115-108-117
9m-200-22-159-168-102-132-55-97-117-117
10m-224-52-156-195-108-165-50-100-131-132
11m-229-31-101-209-115-117-31-97-116-108
12m-246-29-84-206-112-98-17-83-109-91

Source: Bloomberg Finance L.P.

Looking at the last eight Fed hiking cycles, whether there was a soft or hard landing, bond yields always fell over the following 12 months, by 100bp on average.

…supply-demand balance for bonds has deteriorated, but fundamentally growth and inflation could be the constraints.

Figure 11: Annual net issuance of US Treasuries

Source: JPM Rates Strategy team, *2023 are J.P. Morgan estimates

We acknowledge that the supply-demand picture for bonds is not encouraging at present, with US deficit effectively doubling vs a year ago, one of the largest outside recessions.

Figure 12: US 10Y breakevens and 10Y bond yield

Source: Bloomberg Finance L.P.

However, the current level of bond yields is well above what is implied based on market expectations of inflation.

Figure 13: US manufacturing PMI and US 10Y bond yield

Source: Bloomberg Finance L.P., J.P. Morgan

Bond yields are also trading much above where the manufacturing activity is.

Figure 14: % of US domestic banks tightening lending standards

Source: J.P. Morgan.

Tighter monetary and credit conditions are likely to weigh on activity momentum.

Figure 15: Eurozone M1 growth (deflated by HICP) vs manufacturing PMI

Source: Bloomberg Finance L.P., S&P Global

Money supply continues to point to downside for the PMIs.

Figure 16: US M1

Source: Bloomberg Finance L.P.

US money supply also remains very weak.

If yields peak out, as we think is likely, will that support equity valuations? Not necessarily

Figure 17: Rolling correlation between US 10Y bond yield and S&P 500 12m. Fwd P/E

Source: Datastream

The correlation between bond yields and P/E multiples has been inverted for the last few years, but that wasn’t always the case. IF bond yields go lower due to weakening growth outlook, then equity multiples might not benefit.

Table 4: US L2 sectors EPS growth expectations

EPS Growth
'24e'25e
US11.8%12.6%
Energy-0.6%0.8%
Chemicals12.5%11.9%
Construction Materials15.6%11.7%
Metals & Mining-10.1%2.9%
Capital Goods12.7%12.3%
Business Services12.8%12.8%
Transport17.6%15.9%
Automobile13.4%21.3%
Consumer Durables9.8%10.0%
Media22.9%17.0%
Retailing19.5%21.0%
Hotels,Restaurants&Leisure20.2%18.5%
Food&Drug Ret8.2%9.9%
Food Bev&Tob6.8%7.3%
HPC8.1%9.5%
Healthcare13.6%11.8%
Banks-4.6%10.0%
Diversified Financials16.3%14.0%
Insurance24.4%12.8%
Real Estate3.9%10.2%
Software12.2%14.9%
Tech Hardware8.1%12.2%
Semicon29.4%23.6%
Telecoms18.8%14.3%
Utilities7.6%6.8%

Source: IBES

Earnings for S&P500 are expected by consensus to grow 11.8% next year and 12.6% the year after that. That may prove to be too high, especially if growth and pricing disappoint.

Figure 18: Eurozone EPS revisions and Composite PMI

Source: IBES, S&P Global

Earnings revisions are likely to turn negative again, given the rollover in composite PMIs.

Figure 19: Change in P/E vs change in EPS revisions for MSCI World

Source: Datastream

In the end, if earnings expectations roll over again, even with lower yields, P/E multiples are likely to get under pressure. The above chart shows a very strong correlation between EPS momentum and equity valuations.

Figure 20: US 12m Fwd P/E

Source: IBES

The starting point is stretched in the US.

Figure 21: SPX ex Tech 12m Fwd P/E

Source: IBES

Even ex-Tech, there is no cushion for valuations vs history.

Figure 22: SPW 12m Fwd P/E vs 10 year US real yield

Source: Bloomberg Finance L.P., Datastream

Further, as real yields have spiked, P/Es, even looking at equal weighted SPX, which is down on the year, are showing a gap.

Table 5: DM Yield gap in the historical context

Dividend yield10Y Bond yieldDividend yield minus bond yieldAverage since '00Current vs Average (bp)
US1.6%4.9%-3.3%-1.4%-191
Japan2.3%0.8%1.5%0.9%59
Eurozone3.3%3.6%-0.3%0.5%-78
UK3.8%4.6%-0.8%0.6%-142

Source: J.P. Morgan.

The spread between dividend yields and bond yields appears unfavourable for all major equity indices, outside of Japan.

Sector leadership tended to turn Defensive post the final Fed hike in the cycle

Figure 23: Relative US sector 6m returns post final Fed hikes

Source: Datastream

Equity leadership was dominated by Defensive sectors once Fed stopped hiking during previous cycles. Insurance, Staples and Utility sectors performed better than the rest of the market.

Figure 24: European sectors’ average 6m fwd. returns post final Fed hikes

Source: Datastream

Similar trends were observed in Europe.

Figure 25: European and US sectors’ average 12m fwd. returns post final Fed hikes

Source: Datastream

This rotation would last over 12 months, as well.

Figure 26: European Defensives 12m Fwd P/E relative to Cyclicals

Source: Datastream

Now, Defensive sectors are not outright cheap vs Cyclicals, but they have improved substantially vs a year ago.

Figure 27: Eurozone sectoral earnings correlations to Composite PMI

Source: Datastream

They offer relative earnings safety if operating leverage does indeed weaken.

Figure 28: European sector correlation to US 10Y bond yields

Source: Datastream

Finally, they will be a big beneficiary of a potential long duration trade.

Figure 29: European Cyclicals vs Defensives relative and PMI

Source: Datastream

All this comes on top of the relative strong outperformance by Cyclicals vs Defensives this year, which decoupled from the economic momentum.

Banks have done well in 2021 and 2022, and again in the last 6 months in Europe, but time could be approaching to go UW

Figure 30: MSCI Europe Banks relative

Source: Datastream

We were OW European Banks in 2021 and in 2022, and Neutral so far this year. They are attractively priced, have stronger balance sheets than before and benefit from higher bond yields.

Figure 31: Stoxx 600 last 6 months sector performance

Source: Bloomberg Finance L.P.

Post the SVB-driven selloff, US Banks stayed stuck, but European Banks showed a strong rebound, to be the best performing sector over the past 6 months. We might be approaching a good point to initiate a short on Banks, on the likely peaking out in bond yields, growth uncertainty increasing and the credit backdrop worsening.

Figure 32: MSCI Europe Banks 12m Fwd EPS relative

Source: Datastream

Banks earnings have been very strong vs the rest of the market over the past few years, but that could be turning, if NII is close to peaking.

Figure 33: Yield curve and Eurozone Bank NIMs

Source: JPMorgan, Bloomberg Finance L.P.

We believe that margins could start peaking as the deposit rates catch up with the level of short-term yields. The yield curve is extremely inverted and usually precedes worsening margin outlook for the sector.

Figure 34: MSCI Japan Banks relative to Eurozone Banks

Source: Datastream

Within Banks, we keep a preference for Japanese Banks. Our Japan strategist is bullish on Japanese Financials, as well - see here.

Equity Strategy Key Calls and Drivers

Despite some recent weakness, where SPX RSI turned technically oversold, we believe that the equity risk-reward remains challenging. Divergences between softer activity momentum and the elevated equity prices, as well as market internals, that opened up in the summer, are starting to close, but there is more to go. The PMI rebound that many were hoping for, the call that the weakness in manufacturing will end and join the more resilient services, remains elusive. In addition, real rates upmove is pressuring multiples, and this is even taking out Tech. Finally, Brent and USD rally should be seen as concerning for stocks. Most of Brent upmove is supply driven, and could lead to weaker final demand. Corporates might struggle to pass on rising input costs this time, in contrast to ’21-’22. Historically, strengthening USD was almost always met with risk-off in equities. We do not think that bond yields will be able to keep moving up for too much longer, and will likely ultimately fall, and that is precisely because of the “higher for longer” narrative by the Fed. Q4 could end up a very good time to lock in the long duration trade for the next 12 months. SX5E had gone nowhere for half a year now, and has lagged the US since May, coincident with our downgrade to UW – stay short. Even as we remain bearish on China over the medium term, a lot has happened, MSCI China is down 20% since January, and one should not be tactically pressing the shorts into year end, in our view. We advise to close the shorts on Miners, and we stay OW Energy. We were OW Growth vs Value this year, but the Tech run is becoming heavy, so we think that pure Defensives look the best into year end. We are not excited about Eurozone Banks, and globally prefer Japanese Banks.

Table 6: J.P. Morgan Equity Strategy — Factors driving our medium-term views

DriverImpactOur Core Working AssumptionsRecent Developments
Global GrowthNeutralAt risk of weakening as consumer strength wanesGlobal composite PMI is at 50.5
European GrowthNegativeManufacturing and services are converging on the downside; industry data stays weak
Monetary PolicyNeutralFed is unlikely to pivot, unless the macro backdrop deteriorates meaningfully
CurrencyNeutralUSD could strengthen further
EarningsNegativeMargin squeeze and negative operating leverage coming up2023 and 2024 full year earnings projections are not moving higher
ValuationsNegativeUS in particular is unattractive vs bond yields, but Europe screens better MSCI Europe on 11.8x Fwd P/E
TechnicalsNegativeSentiment and positioning are stretchedBull Bear moved into positive territory

Source: J.P. Morgan estimates

Table 7: Base Case and Risks

   Scenario    Assumption
   Upside scenario    No further hawkish tilt by the Fed. No landing
   Base-case scenario    Inflation to fall further, risk of downturn still elevated. Earnings downside from here
   Downside scenario    Further Fed tightening and global recession to become a base case again

Source: J.P. Morgan estimates.

Table 8: Index targets

Dec '23
Target
05-Oct-23% upside
MSCI EMU2562483%
FTSE 1008,1507,4529%
MSCI EUROPE1,8801,7855%
DJ EURO STOXX 504,1504,1001%
DJ STOXX 600 E4654415%

Source: J.P. Morgan.

Table 9: Key Global sector calls

OverweightNeutralUnderweight
UtilitiesTechnologyCapital Goods ex A&D
InsuranceDiscretionary Chemicals
StaplesHealthcareAutos
EnergyMiningRetail

Source: J.P. Morgan

Table 10: J.P. Morgan Equity Strategy — Key sector calls*

SectorRecommendationsKey Drivers
UtilitiesOverweightSector should see less regulatory uncertainty this year; resilient earnings, peaking bond yields are supports
StaplesOverweightSector is one of the best performers around the last Fed hike in the cycle, lower bond yields and better relative EPS momentum should further support
AutosUnderweightPricing power to weaken, consumer to slow down
Capital Goods ex A&DUnderweightSector trades expensive, on peak margins

Source: J.P. Morgan estimates. * Please see the last page for the full list of our calls and sector allocation.

Table 11: J.P. Morgan Equity Strategy — Key regional calls

   RegionRecommendationsJ.P. Morgan Views
   EMNeutralChina tactical chance for a bounce, but structural bearish call remains
   DMNeutral
   USUnderweightExpensive, with earnings risk. However, if markets to weaken into year end, US could fare relatively better vs Eurozone
   JapanOverweightJapan is attractively priced; diverging policy path and TSE reforms are tailwinds
   EurozoneUnderweightGrowth-Policy trade-off likely to deteriorate further; Eurozone is typically a high beta on the way down
   UKOverweightValuations still look very attractive, low beta with the highest regional dividend yield

Source: J.P. Morgan estimates

Top Picks

Table 12: J.P. Morgan European Strategy: Top European picks

EPS GrowthDividend Yield12m Fwd P/EPerformance
NameTickerSectorRatingPriceCurrencyMarket Cap
(€ Bn)
22e23e24e23eCurrent10Y Median% Premium -3m -12m
TOTALENERGIESTTE FPEnergyOW60E 144.2109%-30%-2%5.0%6.610.6-38%13%15%
SHELLSHEL LNEnergyOW30E 194.0116%-23%2%4.5%7.511.2-33%8%9%
BASFBAS GRMaterialsOW42E 37.13%-47%21%7.9%9.813.1-25%-5%-1%
SOLVAYSOLB BBMaterialsOW102E 10.867%-17%-7%4.1%7.812.4-37%1%18%
ANGLO AMERICANAAL LNMaterialsOW2109£ 29.8-31%-43%15%4.5%8.49.7-14%-7%-27%
SAINT GOBAINSGO FPIndustrialsOW54E 27.521%-5%6%3.8%8.512.7-33%-2%38%
VINCIDG FPIndustrialsOW102E 60.766%10%9%4.3%11.715.1-22%-3%21%
ATLAS COPCO AATCOA SSIndustrialsOW147SK59.626%18%5%1.8%24.321.413%-3%33%
REXELRXL FPIndustrialsOW21E 6.359%-12%1%5.7%7.711.8-35%-8%26%
DSVDSV DCIndustrialsOW1295DK38.060%-27%1%0.6%21.221.9-3%-10%42%
AIRBUSAIR FPIndustrialsOW124E 97.621%-3%21%1.6%19.018.15%-7%32%
BAE SYSTEMSBA/ LNIndustrialsOW983£ 34.517%12%8%3.0%14.812.221%8%20%
DR ING HC F PORSCHE PREF.P911 GRDiscretionaryOW89E 80.7-9%7%2.6%14.418.7-23%-21%-
RENAULTRNO FPDiscretionaryOW35E 10.4-138%--3%3.9%2.85.5-49%-10%21%
MERCEDES-BENZ GROUP NMBG GRDiscretionaryOW65E 69.036%-4%0%8.1%5.07.5-33%-12%21%
INDITEXITX SMDiscretionaryOW35E 107.5189%27%27%-19.424.8-22%-3%58%
LVMHMC FPDiscretionaryOW721E 361.817%17%8%1.9%20.521.7-5%-15%13%
WHITBREADWTB LNDiscretionaryOW3317£ 7.4--21%1.5%16.218.6-13%-2%33%
B&M EUROPEAN VAL.RET.BME LNDiscretionaryUW561£ 6.5-5%-12%4%2.6%14.116.8-16%3%75%
TESCOTSCO LNStaplesN280£ 23.081%0%3%3.9%11.413.6-16%13%39%
KONINKLIJKE AHOLD DELHAIZEAD NAStaplesUW29E 27.616%-1%6%3.8%10.813.2-18%-9%11%
ANHEUSER-BUSCH INBEVABI BBStaplesOW51E 103.113%-6%16%1.9%15.719.5-20%-2%8%
DANONEBN FPStaplesOW52E 35.24%0%5%4.0%14.517.3-16%-8%7%
NESTLE 'N'NESN SWStaplesOW103SF285.39%2%8%3.0%19.821.4-7%-4%-4%
ASTRAZENECAAZN LNHealth CareOW10902£ 195.226%11%16%2.3%16.117.8-10%3%10%
NOVO NORDISK 'B'NOVOB DCHealth CareOW636DK384.518%46%18%1.3%31.322.241%16%60%
SIEMENS HEALTHINEERSSHL GRHealth CareOW49E 53.813%-14%17%1.8%20.922.5-7%-4%7%
UBS GROUPUBSG SWFinancialsOW22SF78.89%-39%52%2.4%12.610.422%22%45%
ING GROEPINGA NAFinancialsOW13E 45.3-18%90%-1%8.1%6.49.2-30%0%36%
LONDON STOCK EXCHANGE GROUPLSEG LNFinancialsOW8080£ 50.510%4%12%1.4%22.422.31%-2%4%
AMUNDI (WI)AMUN FPFinancialsOW53E 10.8-11%4%4%7.8%8.412.8-34%-3%19%
SWISS RESREN SWFinancialsOW92SF30.4-67%576%15%6.8%8.410.1-17%4%24%
PRUDENTIALPRU LNFinancialsOW855£ 27.2-1%-6%18%1.9%9.611.7-17%-20%-8%
SAPSAP GRITOW123E 150.4-40%30%17%1.8%20.519.74%0%39%
ASML HOLDINGASML NAITOW548E 221.1-1%37%12%1.2%26.426.21%-17%18%
ADYENADYEN NAFinancialsOW708E 21.919%9%23%0.0%30.187.1-65%-54%-49%
BT GROUPBT/A LNTelecomsOW115£ 13.26%9%-15%6.7%6.29.2-33%-8%-9%
DEUTSCHE TELEKOMDTE GRTelecomsOW20E 98.950%-8%12%3.9%10.714.4-26%0%9%
INFRASTRUTTURE WIRELESS ITALIANE SPA NPVINW IMTelecomsOW10E 10.054%24%19%4.3%24.528.4-14%-13%15%
RELXREL LNIndustrialsOW2852£ 62.317%9%9%2.0%23.619.124%11%25%
PEARSONPSON LNDiscretionaryOW881£ 7.349%10%13%2.6%14.015.1-7%5%-3%
DELIVERY HERODHER GRDiscretionaryOW27E 7.1---0.0%-13.1-29.1--38%-31%
ENGIEENGI FPUtilitiesOW14E 34.474%-14%-13%9.3%7.912.4-36%-8%16%
RWERWE GRUtilitiesOW33E 24.6102%3%-35%3.0%9.213.0-29%-17%-18%
SEGROSGRO LNReal EstateOW710£ 10.17%4%8%3.9%20.625.3-18%-4%-2%
VONOVIAVNA GRReal EstateOW22E 17.93%-2%-2%6.0%10.319.3-47%17%1%

Source: Datastream, MSCI, IBES, J.P. Morgan, Prices and Valuations as of COB 05th Oct, 2023. Past performance is not indicative of future returns.

Please see the most recent company-specific research published by J.P. Morgan for an analysis of valuation methodology and risks on companies recommended in this report. Research is available at http://www.jpmorganmarkets.com, or you can contact the covering analyst or your J.P. Morgan representative.

Equity Flows Snapshot

Table 13: DM Equity Fund Flows Summary

Regional equity fund flows
$mn% AUM
1w1m3mYTD12m1w1m3mYTD12m
Europe ex UK-608-2,215-4,838-9,488-15,869-0.2%-0.7%-1.5%-3.4%-6.9%
UK-925-2,576-8,671-24,193-31,979-0.4%-1.0%-3.2%-9.0%-14.8%
US3,89724,30445,7177,66925,4530.0%0.3%0.5%0.1%0.3%
Japan1,1613,82111,56711,76313,3450.2%0.5%1.6%1.8%2.3%

Source: EPFR, as of 04th Oct, 2023

Figure 35: DM Equity Fund flows – last month

Source: EPFR, Japan includes BoJ purchases.

Figure 36: Cumulative fund flows into regional funds as a percentage of AUM

Source: EPFR, as of 04th Oct, 2023. Japan includes Non-ETF purchases only.

Figure 37: DM Equity Fund flows – last 12 months

Source: EPFR, Japan includes BoJ purchases.

Figure 38: Cumulative fund flows into regional equity ETFs as a percentage of AUM

Source: Bloomberg Finance L.P. *Based on the 25 biggest ETFs with a mandate to invest in that particular region. Japan includes BoJ purchases.

Technical Indicators

Figure 39: S&P500 RSI

Source: Bloomberg Finance L.P.

Figure 40: AAII Bull-Bear

Source: Bloomberg Finance L.P

Figure 41: Sentix Sentiment Index vs SX5E

Source: Bloomberg Finance L.P.

Figure 42: Speculative positions in S&P500 futures contracts

Source: Bloomberg Finance L.P.

Figure 43: Eurostoxx50 RSI

Source: Bloomberg Finance L.P.

Figure 44: Put-call ratio

Source: Bloomberg Finance L.P.

Figure 45: Equity Skew

Source: Bloomberg Finance L.P.

Figure 46: VIX

Source: Bloomberg Finance L.P.

Performance

Table 14: Sector Index Performances — MSCI Europe

(%change)    Local currency
Industry Group4week12mYTD
Europe(2.5)10.83.6
Energy(0.8)7.23.3
Materials(2.2)1.6(5.4)
Chemicals(5.3)2.1(1.6)
Construction Materials0.044.729.6
Metals & Mining1.8(10.0)(20.6)
Industrials(3.7)18.77.9
Capital Goods(4.7)21.37.9
Transport(3.0)19.69.3
Business Svs1.26.06.4
Consumer Discretionary(3.3)16.76.1
Automobile(0.7)21.711.7
Consumer Durables(3.4)14.24.6
Media2.015.48.4
Retailing(5.5)19.32.2
Hotels, Restaurants & Leisure(5.1)16.47.9
Consumer Staples(2.2)(1.1)(3.3)
Food & Drug Retailing(1.8)19.09.3
Food Beverage & Tobacco(3.1)(6.5)(7.4)
Household Products(0.3)7.63.5
Healthcare(2.7)9.74.2
Financials0.819.16.2
Banks3.430.213.4
Diversified Financials(2.5)6.91.0
Insurance(0.7)12.6(0.2)
Real Estate(4.6)3.9(8.8)
Information Technology(6.1)13.611.0
Software and Services(5.2)19.419.8
Technology Hardware(7.1)(14.8)(12.2)
Semicon & Semicon Equip(6.4)20.012.8
Telecommunications Services(0.6)4.95.0
Utilities(7.0)3.5(4.9)

Source: MSCI, Datastream, as at COB 05th Oct, 2023.

Table 15: Country and Region Index Performances

(%change)    Local Currency    US$
CountryIndex4week12mYTD4week12mYTD
AustriaATX(1.5)10.5(1.1)(3.2)18.1(2.4)
BelgiumBEL 20(4.9)0.6(6.3)(6.4)7.5(7.6)
DenmarkKFX(4.8)32.513.8(6.4)41.212.0
FinlandHEX 20(5.0)(9.2)(14.1)(6.6)(2.9)(15.3)
FranceCAC 40(2.7)16.98.1(4.3)24.96.7
GermanyDAX(4.1)20.48.2(5.7)28.66.8
GreeceASE General(7.5)40.924.1(9.0)50.522.5
IrelandISEQ(4.0)26.116.2(5.6)34.814.7
ItalyFTSE MIB(2.4)28.716.0(4.0)37.514.4
JapanTopix(5.0)18.319.7(6.0)15.36.2
NetherlandsAEX(2.4)8.64.8(4.0)16.13.4
NorwayOBX(1.3)4.11.2(3.7)0.7(9.2)
PortugalBVL GEN(7.1)(6.8)(9.8)(8.7)(0.4)(11.0)
SpainIBEX 35(1.6)20.811.3(3.2)29.19.8
SwedenOMX(2.7)13.04.1(1.6)12.7(1.6)
SwitzerlandSMI(1.9)2.90.5(4.2)11.01.7
United StatesS&P 500(4.3)12.610.9(4.3)12.610.9
United StatesNASDAQ(3.8)18.626.3(3.8)18.626.3
United KingdomFTSE 1000.15.7(0.0)(2.4)14.31.1
EMUMSCI EMU(3.6)14.65.6(5.2)22.44.2
EuropeMSCI Europe(2.5)10.83.6(4.2)18.22.8
GlobalMSCI AC World(4.0)11.59.3(4.4)12.78.2

Source: MSCI, Datastream, as at COB 05th Oct, 2023.

Earnings

Table 16: IBES Consensus EPS Sector Forecasts — MSCI Europe

   EPS Growth (%)
20222023E2024E2025E
Europe20.9 (2.2)6.7 8.4
Energy121.8 (30.0)(0.6)(1.5)
Materials2.9 (34.1)10.7 7.2
Chemicals3.1 (25.8)19.3 13.9
Construction Materials17.3 7.2 6.2 10.5
Metals & Mining(2.6)(43.2)3.9 (0.9)
Industrials20.9 (0.0)9.1 12.8
Capital Goods6.8 22.9 11.9 12.3
Transport85.0 (56.9)(10.4)20.8
Business Svs12.7 4.4 9.6 10.0
Discretionary18.2 9.9 5.4 9.8
Automobile17.5 3.4 (1.6)5.3
Consumer Durables15.2 2.7 10.9 11.9
Media37.6 (0.1)10.1 8.3
Retailing1.6 37.0 16.2 18.4
Hotels, Restaurants & Leisure117.8 92.6 23.5 19.8
Staples13.2 2.1 7.3 8.6
Food & Drug Retailing4.9 0.7 11.4 11.1
Food Beverage & Tobacco17.0 1.5 6.6 8.5
Household Products5.6 4.5 7.6 7.8
Healthcare7.5 3.2 12.1 13.4
Financials6.2 17.1 6.6 7.6
Banks9.0 27.3 2.7 6.0
Diversified Financials7.0 (13.1)16.5 14.0
Insurance0.1 16.2 10.8 7.6
Real Estate4.1 11.5 (4.8)3.1
IT0.4 13.6 11.7 17.2
Software and Services(23.5)19.0 14.3 13.1
Technology Hardware1.7 (17.4)19.3 9.5
Semicon & Semicon Equip24.4 25.2 7.6 22.6
Telecoms27.4 (5.0)10.2 9.9
Utilities30.5 2.7 (3.2)0.9

Source: IBES, MSCI, Datastream. As at COB 05th Oct, 2023.

Table 17: IBES Consensus EPS Country Forecasts

   EPS Growth (%)
CountryIndex20222023E2024E2025E
AustriaATX32.7(16.3)0.12.0
BelgiumBEL 202.45.68.016.5
DenmarkDenmark KFX22.4(10.1)13.519.6
FinlandMSCI Finland5.0(23.4)17.28.6
FranceCAC 4028.5(0.2)4.87.9
GermanyDAX9.51.57.19.8
GreeceMSCI Greece121.4(2.4)3.15.7
IrelandMSCI Ireland12.839.84.99.0
ItalyMSCI Italy29.08.7(0.5)2.5
NetherlandsAEX29.4(4.7)6.611.5
NorwayMSCI Norway83.2(37.0)10.1(2.5)
PortugalMSCI Portugal23.530.46.97.1
SpainIBEX 3528.92.61.36.9
SwedenOMX(8.3)31.24.37.7
SwitzerlandSMI2.04.211.310.8
United KingdomFTSE 10028.6(10.3)5.56.0
EMUMSCI EMU19.93.96.69.0
Europe ex UKMSCI Europe ex UK17.72.07.29.4
EuropeMSCI Europe20.9(2.2)6.78.4
United StatesS&P 5007.21.111.712.3
JapanTopix2.813.36.99.3
Emerging MarketMSCI EM6.0(3.9)18.614.4
GlobalMSCI AC World9.70.110.911.5

Source: IBES, MSCI, Datastream. As at COB 05th Oct, 2023** Japan refers to the period from March in the year stated to March in the following year – EPS post-goodwill

Valuations

Table 18: IBES Consensus European Sector Valuations

P/EDividend YieldsEV/EBITDAPrice to Book
2023e2024e2025e2023e2024e2025e2023e2024e2025e2023e2024e2025e
Europe12.411.710.73.7%3.9%4.1%7.77.36.71.71.61.5
Energy6.86.86.95.8%5.5%5.5%3.03.03.21.21.11.0
Materials13.211.911.14.3%4.3%4.4%7.16.55.91.51.41.3
Chemicals19.816.614.63.3%3.4%3.6%10.89.48.62.01.91.8
Construction Materials10.910.39.33.7%3.9%4.1%6.56.05.41.21.21.1
Metals & Mining8.68.38.46.2%5.8%5.9%4.64.43.91.11.11.0
Industrials16.715.313.62.8%2.9%3.2%9.28.67.62.82.62.4
Capital Goods16.614.813.22.7%2.9%3.2%9.88.87.62.82.72.4
Transport13.615.212.63.7%3.4%3.5%6.16.56.21.71.61.5
Business Svs20.818.917.22.5%2.7%2.9%12.511.410.55.65.14.6
Discretionary11.811.210.22.9%3.2%3.5%5.85.34.41.71.51.4
Automobile5.15.25.05.6%5.8%6.1%2.22.41.60.70.70.6
Consumer Durables20.418.416.42.0%2.2%2.5%13.912.210.44.03.63.2
Media & Entertainment15.414.012.92.4%2.6%2.8%12.311.08.81.71.71.6
Retailing16.614.312.12.3%2.7%2.9%13.67.96.93.02.62.4
Hotels, Restaurants & Leisure24.019.416.21.9%2.5%2.8%13.511.59.81.61.41.2
Staples17.216.114.83.0%3.2%3.5%11.410.59.72.72.62.4
Food & Drug Retailing13.412.010.83.6%3.8%4.0%6.66.15.71.71.61.5
Food Beverage & Tobacco16.715.614.43.3%3.6%3.9%11.310.49.72.42.32.2
Household Products20.318.917.52.4%2.5%2.7%14.413.312.24.13.83.5
Healthcare17.315.513.62.5%2.6%2.8%12.511.19.83.43.22.9
Financials8.17.67.05.8%6.4%6.6%1.00.90.8
Banks6.26.15.77.4%8.2%8.4%0.70.70.6
Diversified Financials12.911.19.72.7%3.0%3.2%1.21.21.1
Insurance9.99.08.35.8%6.2%6.6%1.51.41.3
Real Estate11.211.811.45.3%5.5%5.7%0.60.70.7
IT20.418.315.61.5%1.6%1.8%13.412.110.33.93.53.1
Software and Services22.219.517.21.7%1.7%1.9%14.112.611.03.43.23.0
Technology Hardware14.211.910.92.7%3.1%3.4%7.97.26.01.51.41.4
Semicon & Semicon Equip21.319.816.11.1%1.2%1.5%15.113.811.46.75.74.7
Communication Services14.012.711.64.5%4.7%4.9%6.76.45.91.31.31.2
Utilities10.911.311.25.5%5.5%5.8%7.98.07.91.51.51.4

Source: IBES, MSCI, Datastream. As at COB 05th Oct, 2023.

Table 19: IBES Consensus P/E and 12-Month Forward Dividend Yields — Country Forecasts

P/EDividend Yield
CountryIndex12mth Fwd2023E2024E2025E12mth Fwd
AustriaATX6.76.66.66.56.3%
BelgiumBEL 2014.115.013.811.93.2%
DenmarkDenmark KFX24.126.523.419.51.7%
FinlandMSCI Finland13.214.912.711.74.5%
FranceCAC 4011.311.711.210.33.5%
GermanyDAX10.110.710.09.13.7%
GreeceMSCI Greece35.836.635.533.61.5%
IrelandMSCI Ireland12.513.012.411.32.6%
ItalyMSCI Italy7.67.57.67.46.0%
NetherlandsAEX12.713.312.511.22.8%
NorwayMSCI Norway9.910.79.79.96.8%
PortugalMSCI Portugal13.514.213.312.43.8%
SpainIBEX 3510.110.110.09.45.0%
SwedenOMX13.013.412.911.93.9%
SwitzerlandSMI15.316.614.913.53.3%
United KingdomFTSE 10010.110.610.09.44.4%
EMUMSCI EMU11.211.811.110.23.7%
Europe ex UKMSCI Europe ex UK12.513.212.311.33.6%
EuropeMSCI Europe11.812.411.710.73.8%
United StatesS&P 50017.919.617.615.61.6%
JapanTopix13.514.013.112.02.3%
Emerging MarketMSCI EM11.613.110.99.73.1%
GlobalMSCI AC World15.516.815.013.62.2%

Source: IBES, MSCI, Datastream. As at COB 05th Oct, 2023; ** Japan refers to the period from March in the year stated to March in the following year – P/E post goodwill.

Economic, Interest Rate and Exchange Rate Outlook

Table 20: Economic Outlook in Summary

Real GDPReal GDPConsumer prices
% oya% over previous period, saar% oya
20222023E2024E1Q232Q23E3Q23E4Q23E1Q24E2Q24E2Q234Q23E2Q24E4Q24E
United States1.92.31.22.22.13.51.50.50.54.13.32.62.1
Eurozone3.40.50.60.20.50.00.50.70.76.23.42.92.0
United Kingdom4.30.60.21.30.80.01.00.80.08.44.42.53.0
Japan1.01.70.63.24.8-1.20.00.60.63.43.43.72.9
Emerging markets3.53.83.54.01.42.62.01.91.93.44.04.63.9
Global2.92.52.07.41.14.03.43.53.64.33.73.52.9

Source: J.P. Morgan economic research J.P. Morgan estimates, as of COB 29th Sep, 2023

Table 21: Official Rates Outlook

 %Official interest rateCurrentLast change (bp)

Forecast

next change (bp)

Forecast for
Sep 23Dec 23Mar 24Jun 24
United StatesFederal funds rate5.5026 Jul 23 (+25bp)3Q24 (-25bp)5.505.505.505.25
EurozoneDepo rate4.0014 Sep 23 (+25bp)Sep 24 (-25bp)4.004.004.003.75
United KingdomRepo rate5.2503 Aug 23 (+25bp)On hold5.255.255.255.25
JapanOvernight call rate-0.10Jan 16 (-20bp)3Q24 (+10bp)-0.10-0.10-0.100.00

Source: J.P. Morgan estimates, Datastream, as of COB 29th Sep 2023.

Table 22: 10-Year Government Bond Yield Forecasts

10Yr Govt BYForecast for end of
6-Oct-23Dec 23Mar 24Jun 24Sep 24
US4.834.204.053.903.80
Euro Area2.942.202.001.901.80
United Kingdom4.624.304.053.903.75
Japan0.810.750.800.901.00

Source: J.P. Morgan estimates, Datastream, forecasts as of COB 29th Sep, 2023.

Table 23: Exchange Rate Forecasts vs. US Dollar

Exchange rates vs US$Forecast for end of
5-Oct-23Dec 23Mar 24Jun 24Sep 24
EUR1.051.051.051.081.12
GBP1.221.201.201.241.29
CHF0.910.890.900.890.86
JPY149152153153149
DXY106.3107.1107.2104.8101.5

Source: J.P. Morgan estimates, Datastream, forecasts as of COB 29th Sep, 2023.

Sector, Regional and Asset Class Allocations

Table 24: J.P. Morgan Equity Strategy — European Sector Allocation

            MSCI Europe Weights             J.P. Morgan Allocation             Deviation From MSCI             J.P. Morgan Recommendation
Energy6.2%7.0%0.8%OW
Materials6.9%6.0%-0.9%N
ChemicalsUW
Construction MaterialsN
Metals & MiningN
Industrials14.8%14.0%-0.8%N
Capital Goods ex Aerospace & DefenceUW
Aerospace & Defence*OW
TransportN
Business ServicesN
Consumer Discretionary9.6%9.0%-0.6%N
AutomobileUW
Consumer DurablesN
Hotels, Restaurants, LeisureN
Specialty RetailUW
Internet RetailUW
Consumer Staples12.2%13.0%0.8%OW
Food & Drug RetailingN
BeveragesN
Food & TobaccoOW
Household ProductsOW
Healthcare16.4%16.0%-0.4%N
Financials17.7%17.0%-0.7%N
BanksN
InsuranceOW
Real Estate0.8%1.0%0.2%N
Information Technology6.6%7.0%0.4%N
Software and ServicesN
Technology HardwareN
Semicon & Semicon EquipN
Communication Services4.5%5.0%0.5%OW
Telecommunication ServicesOW
MediaN
Utilities4.3%5.0%0.7%OW
100.0%100.0%0.0%Balanced

Source: MSCI, Datastream, J.P. Morgan.

Table 25: J.P. Morgan Equity Strategy — Global Regional Allocation

            MSCI Weights             Allocation             Deviation             Recommendation
            EM10.9%11.0%0.1%Neutral
            DM89.1%89.0%-0.1%Neutral
            US67.7%64.0%-3.7%Underweight
            Japan6.1%9.0%2.9%Overweight
            Eurozone9.8%8.0%-1.8%Underweight
            UK4.3%6.0%1.7%Overweight
            Other*12.1%13.0%0.9%Overweight
            100.0%             100.0%             0.0%             Balanced

Source: MSCI, J.P. Morgan *Other includes Denmark, Switzerland, Australia, Canada, Hong Kong SAR, Sweden, Singapore, New Zealand, Israel and Norway

Table 26: J.P. Morgan Equity Strategy — European Regional Allocation

            MSCI Europe Weights             Allocation             Deviation             Recommendation
            Eurozone51.5%47.0%-4.5%Underweight
            United Kingdom22.7%26.0%3.3%Overweight
            Other**25.9%27.0%1.1%Overweight
            100.0%             100.0%             0.0%             Balanced

Source: MSCI, J.P. Morgan **Other includes Denmark, Switzerland, Sweden and Norway

Table 27: J.P. Morgan Equity Strategy — Asset Class Allocation

            Benchmark Weighting             Allocation             Deviation             Recommendation
            Equities60%55%-5%Underweight
            Bonds30%35%5%Overweight
            Cash10%10%0%Neutral
            100%             100%             0%             Balanced

Source: J.P. Morgan Equity Strategy

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Overweight
(buy)
Neutral
(hold)
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(sell)
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