Equity Research
Equity Strategy : Open UW in Banks, add to Healthcare; Peripheral views; Earnings season update
October 29, 2023
Equity Strategy : Open UW in Banks, add to Healthcare; Peripheral views; Earnings season update
Equity Strategy : Open UW in Banks, add to Healthcare; Peripheral views; Earnings season update
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Equity Strategy

Open UW in Banks, add to Healthcare; Peripheral views; Earnings season update

J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

  • We are advising to open a short in European Banks, we move the sector from Neutral to UW. Banks have been one of the best performers in the past 6 months, second only to Energy, are ahead nicely ytd, up 8% vs SXXP at 1%, to be cumulatively ahead by 60% since Sept 2020. Now that most of the Banks sector Q3 earnings updates are out of the way, we believe that it is a good time to move UW in Europe.
  • If the bond yields are in the process of peaking this quarter, as we suspect – see our recent report on locking in the duration trade, then Banks could start to struggle. After all, the Banks rally was underpinned by the sharp move up in bond yields over the past 3 years, with German 10 year moving from -0.5% to 3%, and US 10 year from 1% to 5%. Any potential fall in yields, or the ECB cuts next year, will reduce Banks’ profitability.
  • Further, Banks’ deposit base is likely to fall, and with rising deposit betas their net interest income is likely peaking now. The unwind of PEPP, TLTROs and QT, along with a potential change in reserve requirements, could be the concerns. From the regulatory side, the sector might not enjoy as favourable a backdrop as it did recently, with buybacks and capital return to shareholders as good as they get. Also, the risk of punitive taxes is elevated – it is being discussed in a number of countries.
  • Finally, Banks remain much more levered than any other sector, and are a beta play on overall activity. Banks could suffer if economies enter contraction, and if some of the very benign credit backdrop changes next year, with spreads widening and delinquencies rising. Regionally, we maintain our preference for Japanese over US and European banks. We are using the funds to upgrade Healthcare, from Neutral to OW. The sector has lagged this year, but could benefit from high USD exposure, low beta and the long duration angle.
  • If Banks start to lag, then the periphery could fall behind core markets. Periphery nicely outperformed the core for a while, Italy is top European performer ytd, up 15%, but Banks relative and peripheral markets relative performances remain very strongly correlated. Within periphery, one could open the Spain vs Italy trade. Spain could benefit from greater Latam exposure, where we remain constructive on Mexico and Brazil, while Italy could see some further widening in government spreads.
  • Looking at the current reporting season, we note an increased share of profit warnings, and topline deterioration – bottom chart. After a long string of robust bottom-up results, it appears that earnings are starting to be more challenging – see our Q3 preview for more details.
  • We remain bearish on the market direction, and our sector positioning stays the barbell of commodities – led by Energy, and the bond proxies – such as Utilities and Staples, which are catching up post the earlier poor performance. This is likely to continue if the long duration trade takes hold, and if the earnings momentum for the overall market deteriorates.

    European Banks have outperformed the market by 60% over the past 3 years, helped by rising earnings and bond yields… this could be changing…

    …periphery likewise was ahead of the core in the last 3 years… if Banks stop working, periphery will too…

    …the latest reporting season is showing the worst topline surprises in Europe on record

    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

Open UW in Banks, add to Healthcare; Peripheral views; Earnings season update

Figure 1: Stoxx600 sectors last 6m performance

Source: Datastream

European Banks have been one of the best performing sectors in the last 6 months, only behind Energy.

Figure 2: Eurozone Banks relative

Source: Datastream

Eurozone Banks in particular are trading around ytd relative highs at present.

Figure 3: MSCI Europe Banks relative and EPS relative

Source: Datastream

European Banks are up 8% ytd, vs SXXP at 1%. The group has seen a substantial 60% outperformance since the lows in September ’20, helped by rising earnings.

Table 1: Past periods of MSCI Europe Banks outperformance

Start dateEnd dateDuration (years)MSCI Europe Banks outperformance (%)
03-Jun-9622-Apr-981.937.2%
10-Mar-0007-Jan-054.870.1%
24-Jul-1215-Jan-141.530.2%
25-Sep-2020-Oct-233.161.4%

Source: Datastream

Past periods of Banks outperforming the market have not tended to be much greater in magnitude, nor in duration, vs the current one.

We believe that the benefits of higher rates are likely now behind us, and NII for Banks is set to peak out. We use this opportunity to downgrade Banks to UW in Europe.

Rates remain a key driver for the sector… the potential peak in bond yields could hurt Banks’ performance

Figure 4: European Banks relative vs US 10Y bond yield

Source: Datastream, Bloomberg Finance L.P.

The rally in Banks coincided with the move up in German 10 year bond yields from -0.5% to 3%, and US from 1 to 5%.

Figure 5: European sectors correlation to bond yields

Source: Bloomberg Finance L.P.

The group traditionally displays the most positive correlation to bond yields. If bond yields peak out, or if ECB cuts rates next year, Banks stocks’ profitability is likely to weaken.

Figure 6: Implied Rate - ECB

Source: Bloomberg Finance L.P.

Our European Banks Research team estimates that a 25 bp rate cut, if it is translated across the curve, would result in a 5% cut in 2025 EPS, assuming a deposit beta of 25%. They flag that this is currently not discounted in consensus estimates – see report.

The sector could face a number of regulatory and other risks

Table 2: Long-Medium Term JPM deposit beta

CountryLong-medium term Deposit Beta
UK50%
France50%
Netherlands50%
Germany35%
SpainHigh 30 – 50%
PortugalHigh 30 – 50%
Italy30 - 40%
Nordics60-70%

Source: J.P. Morgan. European Banks Research

A rise in deposit betas is likely to be a meaningful headwind to the sector.

Figure 7: Average 3m and 12m fwd. Euribor

Source: J.P. Morgan. European Banks Research

Our Banks analysts expect sector NII to peak by the end of this year, as deposit betas rise, Euribor curve falls, and with the potential increase in minimum reserve requirements.

Figure 8: US Deposits, all Commercial Banks

Source: Federal Reserve Economic Data

In addition, they flag that the deposit base is likely to keep falling, both in Eurozone and in the US.

Figure 9: ECB Balance Sheet

Source: J.P. Morgan

The ongoing QT is likely to further hurt deposit growth.

Table 3: Central Bank QT Programmes

QT Programmes
ECB

- APP (Asset purchase programme) - no longer reinvests the principal payments from maturing securities

- PEPP (Pandemic emergency purchase programme) - reinvest the principal payments from maturing securities purchased under the programme until at least the end of 2024 (although the Governing Council will continue applying flexibility in reinvesting redemptions coming due in the PEPP portfolio)

BOEBOE total gilt holdings have fallen from a peak of £875bn to £780bn today, and announced in the last monetary policy meeting, that they would increase the pace of quantitative tightening from £80bn to £100bn a year.
US FedContinues to sell holdings of US Treasuries and mortgage-backed securities(MBS) at a rate of US$95 billion per month (o.w. $60bn treasuries, $35bn MBS)

Source: Bloomberg Finance L.P.

The pace of QT is likely to pick up in most regions.

Table 4: Bank Taxes announced in Europe

RegionFinancial ImpactDetails
ItalyISP and UCG opt out from paying the tax and will boost capital instead. For BAMI, expect ~12% impact on earning if they decide to pay the tax.The tax is based on 40% of excess NII with a cap at 0.26% of RWAs, non-tax deductible, with an option to opt out if banks boost non-distributable reserves by 2.5x tax.
SpainRanging from ∼2-3% for SAN and BBVA to ∼10-14% for the domestic banksThe Spanish banking tax is a 4.8% tax on domestic Spanish NII and fees on banking income (insurance income is excluded), on top of existing corporate tax rate for banks at 30% (vs 25% for corporates). The tax is non-tax deductible. Some recent press articles suggest that the tax could potentially be extended.
Sweden∼4-5% net income impact from SEB, SHB and SwedbankLiabilities linked to the domestic Swedish operations that exceed a set threshold limit set at the start of the fiscal year (2022: SEK150bn, and will increase annually based on an index). All liabilities within a group are included with the exception of intra-group debt, provisions and untaxed reserves, and debt not linked to the Swedish operations-at a tax rate of 0.05% of the tax base for 2022, and 0.06% for 2023 and onwards.
Denmark∼4-5% net income impact from Danske and JyskeCorporate tax rate effectively increased to 25.2% in 2023 and 26% from 2024 for companies in the financial sector.

Source: J.P. Morgan. European Banks Research

In addition, there is a rising risk from new/extended bank taxes, and pressure from governments to increase deposit remuneration. A number of countries have recently introduced tax measures on the banking sector, including Italy, Spain, Sweden, Denmark, Lithuania, Hungary, among others, with more countries likely to follow suit.

Figure 10: European sectors dividend yield

Source: IBES

Total return yield for Banks stocks is the highest among all sectors, with both dividend yield and buybacks yield relatively elevated. However, dividends and buybacks are unlikely to be safe if the credit or macro environment weakens, or if the regulatory scrutiny increases.

Banks are a beta play on overall activity, and could suffer if the economy enters contraction…

Figure 11: European Banks Asset to Equity

Source: Worldscope

Banks have significantly delevered since GFC, with the leverage ratio currently below the long-term average.

Figure 12: MSCI Europe sectors Asset to Equity

Source: Datastream

Still, at 20x, the leverage ratio for Banks is much higher than for other sectors, putting them at greater risk if the overall macro environment becomes more challenging.

Figure 13: Correlation of Eurozone sectors to Eurozone PMI

Source: S&P Global, J.P. Morgan

Additionally, Banks display one of the highest positive correlations to PMIs, and are strongly geared to activity momentum. If the economy weakens, the sector is likely to be hurt meaningfully.

…or if credit conditions worsen

Figure 14: % of US banks reporting stronger loan demand

Source: FRB

Higher rates and restrictive monetary policy have resulted in a sharp decline in loan demand.

Figure 15: % Eurozone banks reporting positive loan demand

Source: ECB

This is true in Europe, as well.

Figure 16: % of US domestic banks tightening lending standards

Source: FRB

Credit standards have tightened.

Figure 17: % of Eurozone banks tightening lending standards

Source: J.P. Morgan.

Lending standards are staying tight in Europe, too.

Figure 18: US and Euro HY spreads

Source: J.P. Morgan.

Credit pricing is relatively benign at present, but is at risk of deteriorating. US and Euro HY spreads have been widening recently.

Figure 19: US and Euro HG spreads

Source: J.P. Morgan.

HG spreads could widen, as well.

Figure 20: European HY maturity profile

Source: J.P. Morgan Credit Strategy

Credit risks are likely to rise, particularly for Banks with exposure to HY corporates, SMEs and commercial real estate, as refinancing needs are set to increase from next year.

Figure 21: Euro HY default rate

Source: JPM European Credit Strategy

Default rates are picking up.

Figure 22: Eurozone Banks provisions

Source: Datastream

Provisioning is likely to rise, as well.

Regionally, we still have preference for Japanese over US and European Banks

Figure 23: Japanese vs US Banks and Japanese vs Eurozone Banks ytd

Source: Datastream

Regionally, we are keeping our preference for Japanese Banks vs both US Banks and European Banks.

We use the funds from the Banks downgrade to add to Healthcare, upgrading the sector from Neutral to OW

Figure 24: European Healthcare price relative

Source: Datastream

European Healthcare sector is down 2% this year vs the broader market.

Figure 25: European Healthcare relative and Healthcare ex Novo Nordisk relative to the market

Source: Datastream, Market cap relative

The bulk of the sector’s performance this year can be attributed to Novo Nordisk, driven by supportive newsflow around its GLP-1 drug. Excluding this stock, the rest of the sector is down 8% ytd.

Figure 26: European Healthcare price relative and EPS relative

Source: Datastream, IBES

Healthcare is a pure Defensive play, with sector earnings typically more insulated than the broader market during periods of economic contraction.

Figure 27: European Healthcare 12m Fwd. EPS relative

Source: IBES

Our Healthcare analysts see upside potential to earnings for the sector, with renewal of pipeline newsflow, and patent expiry risk only at the end of the decade.

Figure 28: Healthcare price relative vs US 10 year bond yield

Source: Datastream

The sector is traditionally a bond-proxy, and should be helped if bond yields peak out.

Figure 29: MSCI Europe Healthcare relative and tradeable USD

Source: Datastream, Bloomberg Finance L.P.

Importantly, Healthcare has meaningful USD revenue exposure, and is likely to do better if the dollar keeps rising.

If Banks start to lag, then the periphery could fall behind core markets…

Figure 30: Periphery vs Core and Banks relative

Source: Datastream

Given the higher weight of Banks in Italy and Spain, the fate of the Periphery vs Core performance is closely tied to that of Banks sector performance. If Banks underperform from here, then Periphery is likely to fall, as well.

Figure 31: Periphery vs Core performance since Jan 2020

Source: Datastream

Periphery has done well relative to core markets in the last few years, but could turn, particularly if peripheral spreads widen.

…within periphery, one could open the Spain vs Italy trade

Table 5: MSCI Spain and Italy sector compositions

MSCI ItalyMSCI Spain
Financials34%33%
Discretionary24%17%
Utilities18%24%
Energy12%5%
Industrials6%9%
Healthcare3%1%
Comm. Services2%11%
Staples2%0%
Materials--
IT--
Real Estate--
Cyclicals30%26%
Defensives25%36%

Source: Datastream

Within periphery, Spain has a greater tilt towards Defensive sectors, and so is better protected against potentially falling rates and a weakening economy. In addition, Spain has higher exposure to Latam countries - our EM team are OW both Brazil and Mexico.

In Brazil, they expect rate cuts to drive better growth, and look for upgrades to current revenue estimates. Mexico has seen robust EPS growth, driven by stronger US and near-shoring trends. Mexican equities still appear attractive on key valuation metrics. The region is also an attractive carry on the USD-MXN trade – see report.

Figure 32: MSCI Spain relative to MSCI Italy

Source: Datastream

Spanish equities have lagged Italian equities since mid-2022, and could rebound from here.

Earnings results are starting to be more challenging

Figure 33: SXXP quarterly EPS growth and Global composite PMI

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

With nearly half the companies having reported so far, earnings delivery has been mixed. In Europe, EPS growth is negative for a second quarter in a row, in line with the more pronounced activity weakness in the region.

There appears to be more profit warnings this quarter compared to average, with several companies flagging lower volumes/demand, deteriorating macro environment and inflation pressure – see Appendix for the full table.

Figure 34: % of companies beating quarterly sales estimates in US and Europe

Source: JPMorgan, Bloomberg Finance L.P.

Notably, top line delivery has been disappointing, particularly in Europe. The proportion of companies beating sales estimates has fallen to the lowest since we started compiling the data more than a decade ago.

In the table below, we outline the important Q3 earnings commentary from key Banking stocks. For those that have not yet reported, we include the earnings preview from our sector analysts.

Table 6: MSCI Europe top 20 Banks Commentary

Company NameTickerWeight in IndexJPM RatingCommentary
HSBC HOLDINGSHSBA LN19.0%NThe focus of results to be on NII momentum and asset quality outlook with China CRE under pressure.
BNP PARIBASBNP FP8.2%NWhile BNP's results were broadly as expected, divisional trends showed weakness in retail-banking operations, particularly in France and Italy, whereas CIB and corporate center showed lower provisions and lower costs.
BANCO SANTANDERSAN SM7.6%NBanco Santander earnings beat estimates as higher interest rates in Europe and Mexico continued to boost revenue and offset a rise in loan loss charges.
BBV.ARGENTARIABBVA SM6.0%NStrong delivery on NII and low CoR in Spain well should bode well for BBVA.
ING GROEPINGA NA5.9%OWAlthough the new taxes are yet to be finalized, based on the current proposal, negative impact on earnings is manageable; total revenue will benefit from fee growth recovering.
UNICREDITUCG IM5.4%OWUniCredit lifted its full-year revenue target for the third straight quarter, and posted better-than-expected third quarter net income and said it will use a get-out clause to avoid paying the Italian government’s bank windfall tax, helping to preserve its plans to return capital to investors and laying the groundwork for peers to follow suit.
INTESA SANPAOLOISP IM4.9%OWIntesa Sanpaolo results are expected to be supported by NII with still low deposit beta and benign cost of risks with costs largely in line with expectations.
NORDEA BANKNDA SS4.4%NSmall NII improvement mainly explained by deposit margins, day count and treasury effects and low loan losses are positives, whereas, slightly weaker than expected trading income is a negative.
LLOYDS BANKING GROUPLLOY LN4.3%UWLloyds beat Q3 expectations helped by a drop in defaults and higher interest rates, but warned that the benefits of higher rates are starting to wane.
BARCLAYSBARC LN3.7%OWBarclays lowered its guidance for net interest margin this year to between 3.05% to 3.1% having already cut this guidance in July, as the benefit of higher interest rates start to fade amid competitive environment for UK retail deposits.
STANDARD CHARTEREDSTAN LN2.7%OWStandard Chartered PLC's third-quarter underlying net profit dropped 30%, weighed by higher credit impairment and operating expenses as the bank suffered a blow of almost $900 billion because of its exposure to China.
SKANDINAVISKA ENSKILDA BANKEN ASEBA SS2.3%UWSEB beat analysts’ estimates for third quarter net income supported by low loan loss provisions and strong trading income.
DNB BANKDNB NO2.3%NNorway's largest lender was unable to meet net interest expectations on repricing lag; asset quality is showing some signs of normalization.
SOCIETE GENERALEGLE FP2.2%NBelow consensus net operating profit expectation, driven by lower revenues in French retail (excluding insurance) and Financial services to corporates.
NATWEST GROUPNWG LN2.0%NNatwest warned that higher interest rates were leading to a shift in deposits. They reported weaker than expected NIM, and lowered FY NIM guidance
CAIXABANKCABK SM2.0%NStrong delivery on NII and low CoR in Spain well should bode well for Caixa Bank.
DANSKE BANKDANSKE DC2.0%NQuestion is how long the lender can sustain high growth trends in net interest income; expect credit losses to remain low.
SWEDBANK ASWEDA SS1.9%NNet interest income continued to soar in the third quarter, but the growth rate was lowest in a year as the rates boost of the recent years is tapering off.
KBC GROUPKBC BB1.9%NExpect a larger margin impact from deposit outflows than previously assumed; fee income should be lower reflecting lower markets and AUM in 3Q.
CREDIT AGRICOLEACA FP1.8%UWPretax profit estimate is below expectations mainly due to lower revenue in Asset Management, Insurance and French Retail, only offset by lower costs and slightly better provisions.

Source: Bloomberg Finance L.P., Datastream

Q3 earnings for Banks were mixed so far, with a number of banks flagging risk to NII, and a benefit from high rates starting to wane.

In terms of positioning, we remain cautious on market direction, and keep a barbell of commodities…

Figure 35: European Metals & Mining relative

Source: Datastream

We have last month advised that Miners could tactically trade better, after being cautious on the sector this year, given the 30% underperformance.

Figure 36: Mining EPS and metal prices

Source: IBES

Mining stocks are likely to see earnings upgrades come through, particularly if commodity prices stay supported. China stimulus is coming through.

Figure 37: Energy sector relative performance vs oil price

Source: Datastream

Energy sector remains our OW, it is a good hedge against geopolitical risks increasing.

Figure 38: MSCI Europe Energy 12m Fwd. P/E relative

Source: Datastream

The sector has re-rated recently, but still trades outright cheap on P/E metric.

…bond proxies such as Utilities and Staples should be relative winners, too

Figure 39: European Utilities relative vs US 10Y bond yield

Source: Datastream, Bloomberg Finance L.P.

Pure Defensive plays like Utilities are also likely to fare better in an environment of potentially peaking bond yields and more challenging earnings.

Figure 40: European Utilities 12m Fwd. EPS relative

Source: IBES

Earnings for Utilities have seen strong positive momentum. We believe high power prices will underpin further earnings support for the sector, with most regulatory headwinds now behind us, too.

Figure 41: European Staples price relative ytd

Source: Datastream

Staples could look more interesting here.

Figure 42: MSCI Europe Staples 12m Fwd. P/E relative

Source: Datastream

Staples are also a bond-proxy, potentially helped by peaking rates, the group is no longer as expensive as before, and their margins are likely to stabilize next year.

Appendix

Table 7: Recent profit warnings

Company NameCompany TickerCommentaryDate1Day Perf relative to market, %SectorMV(in $bn)
RTX CORPRTX US-11 Sep-8.6%Industrials114.3
SIGHT SCIENCES INCSGHT USSight Sciences falls 21% postmarket after the maker of a glaucoma surgery device cut its year revenue outlook, saying uncertainty about the future of Medicare coverage for the company’s products is hurting demand.11 Sep5.4%Health Care0.1
AMERICAN AIRLINES GROUP INCAAL USAmerican Air Cuts Earnings Outlook on Higher Fuel Cost13 Sep-5.8%Industrials7.2
THG PLCTHG LNlowered its sales forecast, held back by inflationary pressures and its beauty division.14 Sep-23.3%Consumer Discretionary1.0
DELTA AIR LINES INCDAL USDelta Air Lines Cuts 3Q Adjusted EPS Forecast14 Sep-1.4%Industrials20.3
NUCOR CORPNUE USSteelmaker blames lower pricing and volumes for downbeat earnings outlook15 Sep-4.9%Materials36.6
BITTIUM OYJBITTI FHBittium lowers its financial outlook for 2023, citing slower pace and lower volumes of deliveries of its tactical communication products and security solutions from the defense and security business unit.15 Sep-6.2%Information Technology0.2
SOCIETE GENERALE SAGLE FPThe French bank on Monday set a goal for annual revenue growth of between zero and 2% over the next three years, down from at least 3%, and slightly lowered the target for return on tangible equity that some analysts had expected to be lifted. 18 Sep-10.9%Financials17.9
NORDIC SEMICONDUCTOR ASANOD NOThe chipmaker reduced quarterly revenue and margin forecasts, citing weak demand across its core markets and no signs of improvement amid an industry downturn.18 Sep-8.8%Information Technology1.5
S4 CAPITAL PLCSFOR LN it said it is maintaining a disciplined cost-management approach.18 Sep-20.9%Communication Services0.4
KINGFISHER PLCKGF LNKingfisher Warns on Profit as Polish, French Shoppers Cut Back19 Sep-12.3%Consumer Discretionary4.6
SMCP SASMCP FPCut its 2023 guidance, citing a slowdown in Europe and lower-than-expected Chinese consumption.19 Sep-29.0%Consumer Discretionary0.3
NAKED WINES PLCWINE LNProfit warned due to oversupply in the sector19 Sep-11.2%Consumer Staples0.0
NORTHCODERS GROUP PLCCODE LNProfit warned due to cautious market conditions19 Sep-32.6%Consumer Discretionary0.0
QUIZ PLCQUIZ LNProfit warned due to cost of living squeeze amid higher interest rates19 Sep-31.5%Consumer Discretionary0.0
SAFESTYLE UK PLCSFE LNProfit warned due to ongoing cost inflation and low consumer confidence19 Sep-47.1%Industrials0.0
SALZGITTER AGSZG GYProfit warned due to continued weakness in steel19 Sep0.0%Materials1.5
EQTEC PLCEQT LNEqtec lowers revenue forecast as files legal claim against Logik20 Sep-17.1%Industrials0.0
HEXATRONIC GROUP ABHTRO SSHexatronic shares slide as much as 12% to the lowest level in more than two years after the Swedish fiber-optic cable manufacturer said it expects to record negative organic revenue growth in second half of 2023.22 Sep-10.9%Industrials0.7
ENTAIN PLCENT LNEntain shares drop as much as 5.4% to the lowest since July 2022 after the gambling company said net gaming revenue was “softer than anticipated” after the summer, and noted a simplification of group structures to reduce costs.25 Sep-12.3%Consumer Discretionary7.1
ASOS PLCASC LNAsos Plc said cash flow is weaker than expected amid falling sales in the fiscal fourth quarter as the British online fashion retailer struggles to turn around its business.  26 Sep-1.5%Consumer Discretionary0.6
HENNES & MAURITZ AB-B SHSHMB SSHennes & Mauritz AB warned that revenue is dropping this month due to an abnormally warm start to autumn in Europe as well as the absence of sales from Russia.27 Sep3.6%Consumer Discretionary21.4
RYANAIR HOLDINGS PLCRYA IDRyanair Holdings Plc Chief Executive Officer Michael O’Leary says discount specialist trying to carry 25% more passengers this winter than pre-Covid, though might have to use lower fares to stimulate demand.27 Sep1.3%Industrials17.1
WORKDAY INC-CLASS AWDAY USSales outlook cut28 Sep-9.1%Information Technology54.2
888 HOLDINGS PLC888 LNWilliam Hill Owner Cuts Earnings Outlook as Sports Bettors Win28 Sep-11.7%Consumer Discretionary0.4
PEPCO GROUP NVPCO PW“In addition, the timing of our autumn/winter collection landing in stores has coincided with persistent record warm weather in our core CEE markets, resulting in weaker customer demand at this time.”28 Sep-20.8%Consumer Discretionary2.4
PHILIP MORRIS INTERNATIONALPM US-28 Sep2.4%Consumer Staples139.5
JETBLUE AIRWAYS CORPJBLU USJetBlue Airways warned of worse-than-expected September bookings and said disruptions tied to air traffic control issues and weather have been greater than expected.28 Sep2.1%Industrials1.4
BOOHOO GROUP PLCBOO LNBoohoo Group Plc lowered its revenue forecast as consumer demand has been sluggish and the fast fashion retailer cuts prices to attract cash-strapped shoppers.03 Oct-2.2%Consumer Discretionary0.5
ALSTOMALO FPThe biggest impact was from much higher inventory levels, after the company hiked output amid tight supply chains to fill its order backlog and avoid production disruption and delivery delays.05 Oct-37.9%Industrials4.8
NORSK HYDRO ASANHY NOCO2 compensation to be lower by NOK1billion than previously expected06 Oct-2.9%Materials11.1
EUROAPI SASUEAPI FPProfit warned due to pricing pressures and destocking09 Oct0.8%Health Care0.5
MIND GYM LTDMIND LNProfit warned over missing market expectations that clients are deferring training and commitment to new spend on back on inflationary pressures09 Oct-37.8%Industrials0.0
CRODA INTERNATIONAL PLCCRDA LNProfit warned due to weaker demand and destocking09 Oct-7.3%Materials7.1
MAISONS DU MONDE SAMDM FPLow consumer confidence and reduced discretionary spending10 Oct-1.0%Consumer Discretionary0.2
ENERAQUA TECHNOLOGIES PLCETP LNProfit warned over number of customers slowing spending and delaying projects to fiscal 202511 Oct-58.2%Industrials0.0
TRAVIS PERKINS PLCTPK LNTravis Perkins warned that falling prices of commodity products have hurt gross profit and narrowed its profit margins11 Oct-6.0%Industrials1.8
FORTERRA PLCFORT LNMarket demand conditions is falling11 Oct-5.0%Materials0.3
PAGEGROUP PLCPAGE LNJob market is tough11 Oct-2.2%Industrials1.5
WATKIN JONES PLCWJG LNProfit warned due to higher costs11 Oct-7.5%Real Estate0.1
SIG PLCSHI LNProfit warned due to further softening in consumer demand12 Oct-9.1%Industrials0.4
HERSHEY CO/THEHSY USHershey to see unfavourable 2024 amid slowing demand, tough competition12 Oct-1.5%Consumer Staples38.7
MOBICO GROUP PLCMCG LNMobico slumps on profit warning because of higher expenses, especially recruitment and examination costs12 Oct-27.9%Industrials0.4
SARTORIUS AG-VORZUGSRT3 GYLower volume expectations13 Oct-12.3%Health Care15.9
WULFF-GROUP OYJWUF1V FHProfit warned due to tightening monetary cycle16 Oct0.8%Consumer Discretionary0.0
CHRISTIE GROUP PLCCTG LN-13 Oct-1.5%Industrials0.0
ERICSSON LM-B SHSERICB SSProfit warned due to macroeconomic uncertainty in 202417 Oct-5.8%Information Technology14.9
BELLWAY PLCBWY LNProfit warned due to lower volume output and pressures of cost inflation17 Oct2.7%Consumer Discretionary2.9
ESKER SAALESK FPEsker falls 6% on profit margin, and may be hurt because of higher commissions paid to sales people for new contract wins18 Oct-1.2%Information Technology0.8
PONSSE OYJPON1V FHProfit warned due to weak economic cycle and persistent inflation. 18 Oct1.6%Industrials0.8
RAUTE OYJ-A SHSRAUTE FHProfit warned due to slower than expected recovery19 Oct-1.1%Industrials0.1
COMET HOLDING AG-REGCOTN SWProfit warned due to later than expected recovery of semis business19 Oct-2.1%Information Technology1.5
EXEL COMPOSITES OYJEXL1V FHProfit warned because of challenging market environment and softer demand19 Oct-2.3%Industrials0.0
RENTOKIL INITIAL PLCRTO LNRentokil Initial warned of weakness saying margins were expected to come down, because of softer demand in North America19 Oct-17.5%Industrials12.4
GJENSIDIGE FORSIKRING ASAGJF NOSevere weather events and one off expenses in 3Q20 Oct6.0%Financials7.4
HUSQVARNA AB-B SHSHUSQB SSWeaker market situation with lower user end demand20 Oct-6.6%Industrials3.7
WORLDLINE SAWLN FPShares of Wordline were cut in half, after the company profit warned blaming a deteriorating environment in Germany25 Oct-59.3%Financials3.2
FORBO HOLDING AG-REGFORN SWForbo shares slump as the company profit warns citing negative currency and macroeconomic conditions25 Oct-2.2%Industrials1.6
CAB PAYMENTS HOLDINGS PLCCABP LNCAB payments suffers shares sell-off after profit warning because of volatility in African currencies were hurting volumes and squeezing margins25 Oct-18.1%Financials0.2
SITOWISE GROUP PLCSITOWS FHProfit warned due to weaker market outlook in Buildings business area25 Oct-2.0%Industrials0.1
META PLATFORMS INC-CLASS AMETA USWarned on revenue outlook due to economic uncertainty and softer advertising spending26 Oct-3.4%Communication Services741.6

Source: Bloomberg Finance L.P.

Equity Strategy Key Calls and Drivers

Despite 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 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 more than 20% since January, and one should not be tactically pressing the shorts into year end, in our view. 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.

Table 8: 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 11.6x Fwd P/E
TechnicalsNegativeSentiment and positioning are no longer as stretchedRSIs close to oversold territory, Vix is not up much yet

Source: J.P. Morgan estimates

Table 9: 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 10: Index targets

Dec '23
Target
26-Oct-23% upside
MSCI EMU2562435%
FTSE 1008,1507,35511%
MSCI EUROPE1,8801,7537%
DJ EURO STOXX 504,1504,0492%
DJ STOXX 600 E4654337%

Source: J.P. Morgan.

Table 11: Key Global sector calls

OverweightNeutralUnderweight
UtilitiesTechnologyCapital Goods ex A&D
InsuranceDiscretionary Chemicals
StaplesMiningAutos
EnergyRetail

Source: J.P. Morgan

Table 12: 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 13: 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 14: J.P. Morgan European Strategy: Top European picks

EPS GrowthDividend Yield12m Fwd P/EPerformance
NameTickerSectorRatingPriceCurrencyMarket Cap
(€ Bn)
22e23e24e23eCurrent10Y Median% Premium -3m -12m
TOTALENERGIESTTE FPEnergyOW63E 152.8109%-29%-1%4.7%6.810.6-36%21%20%
SHELLSHEL LNEnergyOW32E 209.0116%-22%3%4.2%7.911.2-29%17%23%
BASFBAS GRMaterialsOW41E 36.73%-48%21%8.0%9.913.1-24%-12%-8%
SOLVAYSOLB BBMaterialsOW99E 10.467%-18%-7%4.2%7.612.3-39%-3%12%
ANGLO AMERICANAAL LNMaterialsOW2156£ 30.3-31%-43%13%4.4%8.69.7-12%-6%-18%
SAINT GOBAINSGO FPIndustrialsOW50E 25.421%-5%5%4.1%7.912.7-38%-13%27%
VINCIDG FPIndustrialsOW101E 60.166%9%8%4.4%11.715.1-23%-6%16%
ATLAS COPCO AATCOA SSIndustrialsOW143SK58.226%19%4%1.8%24.021.412%-2%31%
REXELRXL FPIndustrialsOW20E 6.059%-12%0%5.8%7.511.7-36%-11%22%
DSVDSV DCIndustrialsOW1131DK33.260%-27%1%0.7%18.921.9-14%-23%19%
AIRBUSAIR FPIndustrialsOW124E 97.921%-3%21%1.6%19.118.15%-8%23%
BAE SYSTEMSBA/ LNIndustrialsOW1041£ 36.217%12%8%2.9%15.712.229%12%29%
DR ING HC F PORSCHE PREF.P911 GRDiscretionaryOW91E 82.1-8%7%2.5%14.618.5-21%-19%-
RENAULTRNO FPDiscretionaryOW33E 9.9-138%--3%4.1%2.65.5-52%-14%4%
MERCEDES-BENZ GROUP NMBG GRDiscretionaryOW63E 67.236%-4%-2%8.3%4.97.5-34%-12%10%
INDITEXITX SMDiscretionaryOW34E 105.8189%27%27%-19.124.7-23%-1%49%
LVMHMC FPDiscretionaryOW671E 336.717%14%7%2.0%19.921.7-8%-21%7%
WHITBREADWTB LNDiscretionaryOW3341£ 7.4--31%1.5%15.218.6-18%-2%31%
B&M EUROPEAN VAL.RET.BME LNDiscretionaryUW554£ 6.4-5%-12%3%2.6%14.316.8-15%-1%80%
TESCOTSCO LNStaplesN274£ 22.381%0%7%4.0%11.213.6-17%7%34%
KONINKLIJKE AHOLD DELHAIZEAD NAStaplesUW28E 26.416%-2%7%4.0%10.413.2-21%-11%-1%
ANHEUSER-BUSCH INBEVABI BBStaplesOW51E 102.113%-6%16%2.0%15.719.5-20%-3%8%
DANONEBN FPStaplesOW54E 36.74%1%5%3.8%15.217.3-12%-3%12%
NESTLE 'N'NESN SWStaplesOW99SF279.39%3%7%3.1%18.921.4-12%-6%-7%
ASTRAZENECAAZN LNHealth CareOW10488£ 186.226%10%15%2.4%15.617.8-12%0%7%
NOVO NORDISK 'B'NOVOB DCHealth CareOW684DK413.418%48%20%1.3%32.822.247%29%71%
SIEMENS HEALTHINEERSSHL GRHealth CareOW47E 51.413%-14%17%1.9%19.922.5-12%-9%4%
UBS GROUPUBSG SWFinancialsOW22SF79.69%-44%65%2.4%13.210.427%18%46%
ING GROEPINGA NAFinancialsOW12E 44.8-18%90%-1%8.2%6.49.2-30%-5%30%
LONDON STOCK EXCHANGE GROUPLSEG LNFinancialsOW8226£ 51.010%4%12%1.4%22.822.32%-2%10%
AMUNDI (WI)AMUN FPFinancialsOW51E 10.4-11%4%3%8.0%8.312.8-35%-11%15%
SWISS RESREN SWFinancialsOW98SF33.1-67%578%15%6.3%9.110.1-10%8%32%
PRUDENTIALPRU LNFinancialsOW860£ 27.1-1%-7%18%1.9%9.911.7-15%-19%-4%
SAPSAP GRITOW126E 154.5-40%27%19%1.7%21.319.78%-1%42%
ASML HOLDINGASML NAITOW563E 226.8-1%38%3%1.2%28.226.28%-14%29%
ADYENADYEN NAFinancialsOW699E 21.719%9%23%0.0%29.687.1-66%-55%-47%
BT GROUPBT/A LNTelecomsOW116£ 13.26%9%-15%6.7%6.39.2-31%-8%-9%
DEUTSCHE TELEKOMDTE GRTelecomsOW20E 100.650%-8%11%3.8%11.114.4-23%4%11%
INFRASTRUTTURE WIRELESS ITALIANE SPA NPVINW IMTelecomsOW10E 9.954%24%19%4.4%23.628.3-16%-12%23%
RELXREL LNIndustrialsOW2880£ 62.317%10%10%2.0%23.719.124%12%30%
PEARSONPSON LNDiscretionaryOW908£ 7.449%11%12%2.5%14.615.1-3%5%2%
DELIVERY HERODHER GRDiscretionaryOW25E 6.6---0.0%-12.1-29.1--40%-30%
ENGIEENGI FPUtilitiesOW15E 36.274%-12%-14%8.9%8.312.3-33%-1%21%
RWERWE GRUtilitiesOW34E 25.3102%3%-34%2.9%9.613.0-26%-13%-10%
SEGROSGRO LNReal EstateOW708£ 10.07%4%8%3.9%20.725.3-18%-11%-1%
VONOVIAVNA GRReal EstateOW21E 16.63%-2%-2%6.4%9.619.3-50%-3%0%

Source: Datastream, MSCI, IBES, J.P. Morgan, Prices and Valuations as of COB 26th 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 15: DM Equity Fund Flows Summary

Regional equity fund flows
$mn% AUM
1w1m3mYTD12m1w1m3mYTD12m
Europe ex UK-372-2,226-4,332-10,107-15,995-0.1%-0.7%-1.4%-3.6%-6.9%
UK-503-1,611-7,564-24,589-31,244-0.2%-0.6%-2.8%-9.1%-14.2%
US34913,21919,4175,06521,0890.0%0.2%0.2%0.1%0.3%
Japan-9023,3809,18811,83413,256-0.1%0.5%1.3%1.9%2.3%

Source: EPFR, as of 18th Oct, 2023

Figure 43: DM Equity Fund flows – last month

Source: EPFR, Japan includes BoJ purchases.

Figure 44: Cumulative fund flows into regional funds as a percentage of AUM

Source: EPFR, as of 18th Oct, 2023. Japan includes Non-ETF purchases only.

Figure 45: DM Equity Fund flows – last 12 months

Source: EPFR, Japan includes BoJ purchases.

Figure 46: 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 47: S&P500 RSI

Source: Bloomberg Finance L.P.

Figure 48: AAII Bull-Bear

Source: Bloomberg Finance L.P

Figure 49: Sentix Sentiment Index vs SX5E

Source: Bloomberg Finance L.P.

Figure 50: Speculative positions in S&P500 futures contracts

Source: Bloomberg Finance L.P.

Figure 51: Eurostoxx50 RSI

Source: Bloomberg Finance L.P.

Figure 52: Put-call ratio

Source: Bloomberg Finance L.P.

Figure 53: Equity Skew

Source: Bloomberg Finance L.P.

Figure 54: VIX

Source: Bloomberg Finance L.P.

Performance

Table 16: Sector Index Performances — MSCI Europe

(%change)    Local currency
Industry Group4week12mYTD
Europe(3.4)5.81.7
Energy(0.5)13.49.2
Materials(3.9)(3.1)(6.5)
Chemicals(3.2)(5.8)(3.3)
Construction Materials(5.0)39.428.1
Metals & Mining(4.5)(9.0)(20.2)
Industrials(5.8)7.13.5
Capital Goods(5.4)10.64.9
Transport(11.5)(2.9)(2.8)
Business Svs(4.5)(4.0)(0.3)
Consumer Discretionary(5.0)7.91.3
Automobile(7.2)7.15.6
Consumer Durables(3.9)5.8(0.6)
Media(1.5)10.06.8
Retailing(6.2)21.4(1.2)
Hotels, Restaurants & Leisure(3.8)5.84.4
Consumer Staples(1.4)(2.3)(4.8)
Food & Drug Retailing(1.7)7.66.4
Food Beverage & Tobacco(1.5)(7.8)(8.7)
Household Products(1.2)8.91.8
Healthcare(4.1)4.01.2
Financials(4.5)12.43.6
Banks(5.9)20.88.8
Diversified Financials(5.4)(0.8)(2.2)
Insurance(1.4)10.70.7
Real Estate(3.5)(8.8)(12.0)
Information Technology0.79.611.7
Software and Services2.815.322.6
Technology Hardware(3.6)(16.5)(14.7)
Semicon & Semicon Equip0.215.413.0
Telecommunications Services(2.4)3.13.4
Utilities0.55.6(1.2)

Source: MSCI, Datastream, as at COB 26th Oct, 2023.

Table 17: Country and Region Index Performances

(%change)    Local Currency    US$
CountryIndex4week12mYTD4week12mYTD
AustriaATX(4.0)5.6(3.3)(4.2)10.8(4.4)
BelgiumBEL 20(6.3)(6.6)(10.8)(6.4)(2.0)(11.9)
DenmarkKFX(0.9)28.515.2(1.1)34.313.4
FinlandHEX 20(4.2)(13.8)(15.7)(4.4)(9.6)(16.7)
FranceCAC 40(3.2)9.86.4(3.4)15.25.1
GermanyDAX(3.9)11.65.8(4.0)17.14.5
GreeceASE General(1.3)36.526.6(1.5)43.225.1
IrelandISEQ(7.4)12.19.4(7.6)17.68.0
ItalyFTSE MIB(2.3)22.916.0(2.5)28.914.6
JapanTopix(5.2)16.017.6(5.8)13.13.1
NetherlandsAEX(0.9)8.14.4(1.1)13.43.1
NorwayOBX(2.7)3.11.2(6.9)(5.7)(11.2)
PortugalBVL GEN0.6(4.5)(5.1)0.40.2(6.2)
SpainIBEX 35(4.9)13.98.9(5.1)19.57.6
SwedenOMX(3.4)4.81.0(5.4)2.1(5.8)
SwitzerlandSMI(5.0)(4.2)(3.4)(3.1)5.3(0.5)
United StatesS&P 500(3.8)8.07.8(3.8)8.07.8
United StatesNASDAQ(4.6)14.820.3(4.6)14.820.3
United KingdomFTSE 100(3.3)4.2(1.3)(3.8)8.9(0.5)
EMUMSCI EMU(3.4)8.23.7(3.6)13.52.4
EuropeMSCI Europe(3.4)5.81.7(3.5)11.01.1
GlobalMSCI AC World(3.9)7.46.5(4.0)8.15.3

Source: MSCI, Datastream, as at COB 26th Oct, 2023.

Earnings

Table 18: IBES Consensus EPS Sector Forecasts — MSCI Europe

   EPS Growth (%)
20222023E2024E2025E
Europe20.8 (2.5)6.8 8.6
Energy121.8 (28.9)0.7 (0.5)
Materials2.9 (35.6)11.0 7.9
Chemicals3.1 (28.3)21.1 14.2
Construction Materials17.1 9.0 6.7 8.9
Metals & Mining(2.6)(45.0)2.8 0.9
Industrials20.9 (0.5)9.3 12.5
Capital Goods6.8 22.3 12.0 12.6
Transport84.9 (57.3)(9.4)15.3
Business Svs12.7 4.2 9.8 10.0
Discretionary18.2 9.7 5.1 9.9
Automobile17.5 4.0 (1.7)5.0
Consumer Durables15.2 0.9 9.9 12.8
Media37.6 0.3 10.2 8.3
Retailing1.8 36.8 16.5 18.5
Hotels, Restaurants & Leisure118.0 92.7 23.8 19.5
Staples13.2 2.2 7.4 8.8
Food & Drug Retailing4.9 1.5 11.8 11.7
Food Beverage & Tobacco17.0 1.4 6.7 8.7
Household Products5.6 4.7 7.8 7.9
Healthcare7.5 2.6 11.7 13.8
Financials6.2 16.4 7.1 7.7
Banks9.0 26.8 3.0 6.2
Diversified Financials7.0 (14.3)17.6 13.8
Insurance0.1 15.2 11.5 7.6
Real Estate4.1 11.2 (1.4)(0.1)
IT0.3 12.5 8.8 18.9
Software and Services(23.5)17.8 15.0 13.3
Technology Hardware1.7 (20.9)19.9 9.1
Semicon & Semicon Equip24.4 25.3 1.6 26.2
Telecoms27.3 (5.0)10.1 9.7
Utilities30.4 2.7 (3.2)1.1

Source: IBES, MSCI, Datastream. As at COB 26th Oct, 2023.

Table 19: IBES Consensus EPS Country Forecasts

   EPS Growth (%)
CountryIndex20222023E2024E2025E
AustriaATX36.3(16.3)(0.2)3.2
BelgiumBEL 202.34.68.017.2
DenmarkDenmark KFX22.3(9.7)15.119.1
FinlandMSCI Finland5.0(23.9)16.68.4
FranceCAC 4028.5(0.4)5.28.6
GermanyDAX9.51.07.39.6
GreeceMSCI Greece121.42.60.55.4
IrelandMSCI Ireland12.839.95.38.6
ItalyMSCI Italy29.09.20.22.9
NetherlandsAEX29.4(4.3)5.612.2
NorwayMSCI Norway83.6(38.5)12.2(1.8)
PortugalMSCI Portugal23.530.58.26.6
SpainIBEX 3528.92.51.56.9
SwedenOMX(8.3)31.83.97.8
SwitzerlandSMI2.03.010.910.9
United KingdomFTSE 10028.6(10.5)5.66.3
EMUMSCI EMU19.83.56.79.3
Europe ex UKMSCI Europe ex UK17.61.67.49.7
EuropeMSCI Europe20.8(2.5)6.88.6
United StatesS&P 5007.30.512.012.3
JapanTopix2.811.88.29.3
Emerging MarketMSCI EM5.9(4.2)18.614.6
GlobalMSCI AC World9.7(0.4)11.311.5

Source: IBES, MSCI, Datastream. As at COB 26th Oct, 2023** Japan refers to the period from March in the year stated to March in the following year – EPS post-goodwill

Valuations

Table 20: IBES Consensus European Sector Valuations

P/EDividend YieldsEV/EBITDAPrice to Book
2023e2024e2025e2023e2024e2025e2023e2024e2025e2023e2024e2025e
Europe12.211.510.53.8%4.0%4.2%7.67.26.61.71.61.5
Energy7.17.07.15.5%5.3%5.3%3.13.03.21.31.21.1
Materials13.412.011.24.2%4.2%4.4%7.06.55.91.51.41.3
Chemicals20.216.714.63.3%3.4%3.6%10.79.38.51.91.91.8
Construction Materials10.610.09.13.8%3.9%4.2%6.45.95.31.21.11.0
Metals & Mining8.98.78.65.8%5.5%5.6%4.64.44.11.21.11.0
Industrials16.114.713.12.8%3.0%3.3%9.08.47.42.72.52.3
Capital Goods16.114.412.82.7%2.9%3.2%9.68.67.52.82.62.4
Transport12.213.511.74.1%3.7%3.8%5.86.36.01.51.51.4
Business Svs19.517.716.12.6%2.8%3.1%12.611.410.45.34.94.3
Discretionary11.310.89.83.1%3.4%3.7%5.55.14.21.71.61.4
Automobile4.84.94.76.0%6.2%6.5%2.12.31.50.70.60.6
Consumer Durables19.818.016.02.1%2.3%2.6%13.111.710.43.83.43.1
Media & Entertainment15.113.712.62.5%2.7%2.8%12.211.08.81.71.61.5
Retailing16.113.811.62.3%2.8%3.0%13.67.96.92.92.52.4
Hotels, Restaurants & Leisure23.218.715.72.0%2.6%2.9%13.311.29.63.53.22.9
Staples16.915.814.53.1%3.3%3.5%11.210.49.62.72.62.4
Food & Drug Retailing12.911.610.43.6%3.9%4.1%6.56.05.71.61.61.5
Food Beverage & Tobacco16.515.414.23.4%3.6%3.9%11.110.39.62.42.32.2
Household Products19.918.517.12.4%2.5%2.7%14.313.212.14.03.83.5
Healthcare16.815.013.22.6%2.7%3.0%12.411.09.83.43.12.8
Financials7.97.46.95.9%6.5%6.8%0.90.90.8
Banks6.05.85.57.8%8.6%8.8%0.70.70.6
Diversified Financials12.710.89.52.8%3.0%3.3%1.11.21.1
Insurance10.19.18.55.7%6.1%6.5%1.51.41.3
Real Estate10.710.910.95.6%5.8%6.0%0.60.70.6
IT20.819.116.11.5%1.6%1.8%13.112.210.23.93.63.2
Software and Services23.020.017.71.6%1.7%1.8%14.212.911.23.63.33.1
Technology Hardware14.311.911.02.8%3.1%3.4%8.47.16.31.61.51.4
Semicon & Semicon Equip21.421.016.71.1%1.2%1.4%14.113.810.96.75.74.8
Communication Services13.812.511.44.5%4.7%4.9%6.76.45.91.31.31.2
Utilities11.311.711.65.4%5.4%5.6%7.87.97.81.61.51.4

Source: IBES, MSCI, Datastream. As at COB 26th Oct, 2023.

Table 21: IBES Consensus P/E and 12-Month Forward Dividend Yields — Country Forecasts

P/EDividend Yield
CountryIndex12mth Fwd2023E2024E2025E12mth Fwd
AustriaATX6.46.46.46.26.3%
BelgiumBEL 2013.514.413.311.43.5%
DenmarkDenmark KFX23.826.823.319.51.8%
FinlandMSCI Finland12.714.512.411.55.0%
FranceCAC 4011.111.511.010.13.7%
GermanyDAX9.910.59.88.94.0%
GreeceMSCI Greece34.835.034.833.01.5%
IrelandMSCI Ireland11.712.211.610.73.0%
ItalyMSCI Italy7.57.57.57.36.1%
NetherlandsAEX12.813.312.611.22.9%
NorwayMSCI Norway9.810.89.69.86.4%
PortugalMSCI Portugal14.115.113.913.14.0%
SpainIBEX 359.89.99.89.25.2%
SwedenOMX12.613.012.511.64.1%
SwitzerlandSMI14.816.114.613.13.6%
United KingdomFTSE 10010.010.49.99.34.5%
EMUMSCI EMU11.011.610.910.03.9%
Europe ex UKMSCI Europe ex UK12.213.012.111.03.7%
EuropeMSCI Europe11.612.211.510.53.9%
United StatesS&P 50017.319.217.115.21.7%
JapanTopix13.213.912.911.82.5%
Emerging MarketMSCI EM11.513.310.79.83.2%
GlobalMSCI AC World15.517.014.513.72.4%

Source: IBES, MSCI, Datastream. As at COB 26th 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 22: Economic Outlook in Summary

Real GDPReal GDPConsumer prices
% oya% over previous period, saar% oya
20222023E2024E1Q232Q233Q23E4Q23E1Q24E2Q24E2Q234Q23E2Q24E4Q24E
United States1.92.41.42.22.14.91.50.50.54.13.32.62.1
Eurozone3.40.50.60.20.50.00.50.70.76.23.32.92.1
United Kingdom4.30.60.21.30.80.01.00.80.08.44.42.53.0
Japan1.01.90.73.24.80.20.00.60.63.43.74.13.4
Emerging markets3.53.93.64.01.43.32.11.91.93.43.94.53.8
Global2.92.62.17.41.14.83.63.53.64.33.63.53.0

Source: J.P. Morgan economic research J.P. Morgan estimates, as of COB 19th Oct, 2023

Table 23: Official Rates Outlook

 %Official interest rateCurrentLast change (bp)

Forecast

next change (bp)

Forecast for
Dec 23Mar 24Jun 24Sep 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 19th Oct 2023.

Table 24: 10-Year Government Bond Yield Forecasts

10Yr Govt BYForecast for end of
27-Oct-23Dec 23Mar 24Jun 24Sep 24
US4.864.754.554.204.00
Euro Area2.832.502.202.001.90
United Kingdom4.574.404.153.903.75
Japan0.880.750.800.901.00

Source: J.P. Morgan estimates, Datastream, forecasts as of COB 19th Oct, 2023.

Table 25: Exchange Rate Forecasts vs. US Dollar

Exchange rates vs US$Forecast for end of
26-Oct-23Dec 23Mar 24Jun 24Sep 24
EUR1.051.001.031.051.10
GBP1.211.141.181.211.26
CHF0.900.930.920.910.87
JPY150152153153149
DXY106.6111.3108.9107.2103.0

Source: J.P. Morgan estimates, Datastream, forecasts as of COB 19th Oct, 2023.

Sector, Regional and Asset Class Allocations

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

            MSCI Europe Weights             J.P. Morgan Allocation             Deviation From MSCI             J.P. Morgan Recommendation
Energy6.6%8.0%1.4%OW
Materials7.0%6.0%-1.0%N
ChemicalsUW
Construction MaterialsN
Metals & MiningN
Industrials14.6%14.0%-0.6%N
Capital Goods ex Aerospace & DefenceUW
Aerospace & Defence*OW
TransportN
Business ServicesN
Consumer Discretionary9.2%8.0%-1.2%N
AutomobileUW
Consumer DurablesN
Hotels, Restaurants, LeisureN
Specialty RetailUW
Internet RetailUW
Consumer Staples12.4%13.0%0.6%OW
Food & Drug RetailingN
BeveragesN
Food & TobaccoOW
Household ProductsOW
Healthcare16.3%18.0%1.7%OW
Financials17.7%15.0%-2.7%UW
BanksUW
InsuranceOW
Real Estate0.7%1.0%0.3%N
Information Technology6.7%7.0%0.3%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 27: 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 28: 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 29: 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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J.P. Morgan Equity Research Ratings Distribution, as of October 07, 2023

Overweight
(buy)
Neutral
(hold)
Underweight
(sell)
   J.P. Morgan Global Equity Research Coverage*47%39%14%
       IB clients**47%45%33%
   JPMS Equity Research Coverage*46%41%13%
       IB clients**65%64%51%

*Please note that the percentages may not add to 100% because of rounding.
**Percentage of subject companies within each of the "buy," "hold" and "sell" categories for which J.P. Morgan has provided investment banking services within the previous 12 months.

For purposes of FINRA ratings distribution rules only, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold rating category; and our Underweight rating falls into a sell rating category. Please note that stocks with an NR designation are not included in the table above. This information is current as of the end of the most recent calendar quarter.

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