Equity Research
Equity Strategy : The underperformance of Consumer Cyclical stocks can have legs; Implications of CESI moving negative
July 8, 2024
Equity Strategy : The underperformance of Consumer Cyclical stocks can have legs; Implications of CESI moving negative
Equity Strategy : The underperformance of Consumer Cyclical stocks can have legs; Implications of CESI moving negative
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08 July 2024

Equity Strategy

The underperformance of Consumer Cyclical stocks can have legs; Implications of CESI moving negative

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.

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Autos, Luxury, Airlines and Hotels & Leisure sectors have all been softening of late. We think this continues

CESIs in all key regions have moved negative most recently… this is typically a problem for Cyclicals and Banks

Banks profits increased on rising rates in the last 4 years, this is turning now

Source: Datastream, Bloomberg Finance L.P.

  • The consensus view in the first half of the year has been to buy Cyclical sectors on PMI rebound, and also to favour consumer exposure on an improvement in real disposable incomes. While we have some sympathy with the view that European consumers could fare better this year than last, on falling inflation and on rate cuts, and clearly the Eurozone consumer wasn’t maxed out, with still elevated net wealth position, we have argued through Q2 to play a barbell of Defensives together with Mining - see report. Stylewise, we entered the year again OW Growth vs Value, same as last year, and keep that view, for now. Also, one should note the terrible performance of small caps everywhere again this year - behind by 15% in the US, 3% in Europe and 11% in Japan so far in 2024. Within this, we have very recently advised to finally turn more bullish on some selected small caps, such as FTSE250 in the UK - see report, to take advantage of the heavy prior underperformance and political changes.
  • On the short side, we have specifically focused on Consumer Cyclical plays - such as Autos and Luxury, and now the question is whether one should use the recent weakness in the space to add - top chart. We think that there is likely further underperformance ahead, and stay cautious on Consumer space more broadly, on likely unwind of prior strong pricing power, building margin squeeze, likely softening final demand and potential labour market weakening:
  • Autos (UW): Autos have significantly underperformed in the past few months, on weak commentary from the OEMs. Key issues being flagged are: inventories have normalised, demand is softer, prices in ICE are still holding up, but mix is weaker, and China keeps getting tougher. We stay UW Autos, expecting continued pricing weakness and rising China competition.
  • Luxury (N): Luxury has also underperformed, and we think the sector will continue to struggle on softer pricing. Luxury stocks are still expensive relative to the market and our analysts see few positive catalysts for 2H.
  • Discretionary Retail (UW): Retailers have seen a series a profit warnings recently, including H&M and Nike. While higher freight costs and cotton prices have been key headwinds so far, potential consumer weakness going forward is likely to lead to further disappointments.
  • Hotels, Restaurants & Leisure (UW): the high-end segment is holding up, but the low-end segment is showing signs of weakness. RevPar is still robust, but could come under pressure if pricing and occupancy rates roll over.
  • Airlines (UW): A combination of higher oil prices, extra capacity and more downbeat demand expectations have weighed on Airlines stocks, down 20% relative in last 3-4 months. We believe these will continue to disappoint.
  • Bigger picture, CESIs have moved negative recently in a number of key regions, in US, Eurozone, China and Japan. Typically, when CESIs deteriorate, sector leadership is lower beta. Apart from Cyclicals, Financials in particular tended to consistently underperform when CESIs move lower. Banks could also be seeing peaking profits on ECB cuts - bottom chart.

The underperformance of Consumer Cyclical stocks can have legs; Implications of CESI moving negative

Figure 1: Global Composite PMI

Source: S&P Global

Global growth backdrop had been improving since Q4 of last year, with Global PMIs moving up. The fall in the June reading comes after 7 months of sequential advance in the PMI data. The upmove earlier in the year has prompted many to look for a Cyclical rally and the broadening in leadership, regionally and stylewise.

Figure 2: Eurozone retail sales and consumer confidence

Source: Bloomberg Finance L.P.

The consensus view was also to be bullish on consumer on the likely improvement in real disposable incomes.

Figure 3: UK, Germany and France household savings rate

Source: Bloomberg Finance L.P.

We do have sympathy with some better European consumer performance, as that cohort has not spent much of the accumulated savings yet.

The market leadership stayed quite narrow in 1H, though...

Figure 4: S&P500 and S&P500 equal weighted ytd performance

Source: Bloomberg Finance L.P.

Despite the optimism at the start of the year, equal weighted SPX has peaked already in March, with all the gains in the past few months driven by just a few stocks.

Figure 5: MSCI US and European Growth vs Value performance

Source: Datastream

We entered this year again OW Growth vs Value style, same as in 2023, and note that Growth strongly outperformed in the US, and also in Europe.

Table 1: Key regions small vs large cap ytd performance

YTD performance
MSCI US Small Caps 0.8%
Large Caps 15.7%
MSCI Eurozone Small Caps 1.9%
Large Caps 8.3%
MSCI UK Small Caps 4.0%
Large Caps 6.4%
MSCI Japan Small Caps 13.0%
Large Caps 24.4%

Source: Datastream

We have also kept UW on small caps in 1H again, after 2 years of UW of small caps. The weakness in small caps has been clear everywhere again this year, heavily behind large caps.

Figure 6: MSCI Europe sectors Q1 ‘24 and Q2 ‘24 relative performance

Source: Datastream

Cyclical sectors did perform better in 1Q this year, but have since struggled to lead.

...within this, we have last month advised to add to selective small caps, in particular to UK small caps - FTSE250...

Figure 7: FTSE250 relative to FTSE100

Source: Datastream

While we remain bearish on US small caps, and keep OW on Nasdaq vs Russell2000, we do think in some international markets small caps could do better in 2H.

Figure 8: FTSE100 vs FTSE250 since Jan’21

Source: Datastream

For UK in particular, we reversed our long-lasting large cap preference last month, expecting UK election outcome to help small caps from here.

Figure 9: MSCI UK Small vs large cap performance around BoE first cut

Source: Datastream

BoE is set to start easing from August, which typically helped turn the fortunes of the group.

...Consumer Cyclicals in particular struggled this year… should one use this as an opportunity to add?

Figure 10: MSCI Europe cyclical sectors ytd relative performance

Source: Datastream

Ytd, European Autos, Airlines, Luxury, Hotels have all performed poorly. The question is whether the weakness in some of these consumer cyclical sectors presents an opportunity for investors? While we have some sympathy in the idea that the European consumer could fare better this year than last, as inflationary pressures ease and policy rates are cut, we believe that the recent underperformance of these stocks could continue, as tailwinds in the form of strong pricing power and elevated margins fade.

We do not think so, and stay UW most consumer groups - Labour market could weaken in the US...

Figure 11: US Initial Jobless Claims

Source: Bloomberg Finance L.P.

In the US, initial jobless claims have been trending higher over the last couple of months.

Figure 12: US Continuing Jobless Claims

Source: Bloomberg Finance L.P.

Continuing claims have been up in each of the last 9 weeks.

Figure 13: US Quits rate vs Atlanta Fed wage tracker

Source: Bloomberg Finance L.P.

The downshift in number of employees quitting in the US is consistent with slower pace of wage growth going forward.

Figure 14: US Manufacturing and Services ISM - Employment

Source: Bloomberg Finance L.P.

Business surveys have also been pointing to a softening labour market. The employment component of ISM Manufacturing was holding up so far but weakened in the the month of June, and Services employment is downshifting.

Figure 15: Eurozone Manufacturing and Services PMI - employment

Source: S&P Global

Similar weakness is evident in the Eurozone business surveys, as well.

Weaker end demand could also hurt margins and pricing power

Figure 16: MSCI Europe Consumer Discretionary 12m trailing EBIT margin

Source: Datastream

The supply-demand distortions driven by the COVID-era shutdowns drove margins for consumer sectors to record highs. These are starting to normalize.

Table 2: JPM Real GDP projections

Real GDP
% over previous period, saar
4Q23 1Q24 2Q24E 3Q24E 4Q24E 1Q25E
United States 3.4 1.4 2.0 1.0 1.0 2.0
Eurozone -0.2 1.3 1.5 1.5 1.0 1.0
United Kingdom -1.2 2.9 2.0 1.0 1.0 0.8
Japan 0.4 -1.8 1.5 1.0 0.8 0.6
Emerging markets 4.1 6.1 3.0 3.5 3.5 3.4
Global 2.7 3.2 2.2 2.2 2.1 2.3

Source: J.P. Morgan

Activity is expected to moderate in the coming quarters. All of these point to a more modest pricing environment for the consumer sectors.

...reiterate our cautious view on Autos...

Figure 17: MSCI Europe Autos relative

Source: Bloomberg Finance

Auto stocks have significantly underperformed over the past few months.

Figure 18: European Autos EPS/Sales

Source: Datastream

EBIT margins for the sector are still elevated in a historical context, and will be under pressure from a rollover in pricing and more Chinese competition. Inventory levels have normalized.

Figure 19: Car buying Incentives in China (%)

Source: JPM European Autos Research team

Incentives are going up.

Figure 20: Weighted average discounts across Europe

Source: JPM European Autos Research team

Pricing power is also coming under pressure.

...Luxury...

Figure 21: MSCI Europe Luxury price relative

Source: Datastream

Luxury has also struggled in the past months, and we have cautioned that pricing in the sector could come under pressure - see report. Our sector analysts flag muted earnings momentum for the group, and see few positive catalysts for 2H. The key stock within the sector, LVMH, is likely to see topline soften for most segments. This, coupled with FX headwinds, should lead to EBIT margin pressure - see report.

Figure 22: European Luxury 12m Fwd P/E relative

Source: IBES

Luxury stocks still trade outright expensive relative to the market.

...Retail...

Table 3: Profit warnings so far

Company Name Company Ticker Commentary Date 1Day Perf relative to market, % Sector
YOUGOV PLC YOU LN YouGov shares plunge after polling and data analytics group warned that annual profits would fall short of forecasts 20 Jun -47.2% Communication Services
SIG PLC SHI LN SIG profit warns due to challenging market conditions 24 Jun -5.8% Industrials
AIRBUS SE AIR FP Airbus shares fall as plane maker cuts profit forecast as its supply chain disruptions worsened 25 Jun -9.2% Industrials
POOL CORP POOL US Pool shares slump after swimming pool supplies distributor slashes earnings forecast citing challenges in discretionary parts of its business amid cautious consumer spending 25 Jun -8.4% Consumer Discretionary
SOUTHWEST AIRLINES CO LUV US Southwest Air cuts revenue outlook as CEO fends off activist 26 Jun -0.4% Industrials
WALGREENS BOOTS ALLIANCE INC WBA US Walgreens shares plunge on outlook cut and more stores closings in continued challenging environment 27 Jun -22.2% Consumer Staples
HENNES & MAURITZ AB-B SHS HMB SS H&M profit warns due to a challenging macro environment that will influence  purchasing costs and sales revenues  27 Jun -12.5% Consumer Discretionary
NIKE INC -CL B NKE US Nike tumbles after warning that it expects sales to drop 10% during its current quarter 28 Jun -19.6% Consumer Discretionary
AIR FRANCE-KLM AF FP Air France expects revenue and profit hit as fliers avoid Paris Olympics 01 Jul -1.9% Industrials
NANOCO GROUP PLC NANO LN Nanoco Group profit warns because of order delay 02 Jul -24.3% Information Technology
NORWEGIAN AIR SHUTTLE AS NAS NO Norwegian Air shares slide after the carrier cut its EBIT outlook, citing higher costs, softer traffic demand and aircraft delivery delays from Boeing.  04 Jul -16.5% Industrials

Source: Bloomberg Finance L.P.

A number of retailers have profit warned in recent weeks.

Figure 23: World Container prices

Source: Bloomberg Finance L.P.

Elevated freight rates have been hurting the sector.

Figure 24: DXY ytd

Source: Bloomberg Finance L.P.

The sector also struggles in a stronger dollar environment.

...Hotels, Restaurants and Leisure...

Figure 25: MSCI Europe Hotels,Restaurants&Leisure relative performance

Source: Bloomberg Finance L.P.

The hotels sector has underperformed the broader index by 7% year to date.

Figure 26: Rev Par - Key Regions

Source: J.P. Morgan European Leisure, Hotels & Gaming research

We note that metrics such as RevPar are holding up relatively well. Our sector analysts believe that this is largely due to the “high-end” segment performing better, while the low-end segment is under pressure. We believe that the sector could come under pressure if pricing and occupancy rates fall from here.

and Airlines

Figure 27: Bloomberg European Airlines relative

Source: Bloomberg Finance L.P.

Higher oil prices, capacity growth and weakening demand have weighed on Airlines.

Figure 28: Transatlantic capacity growth, in ASKs yoy

Source: J.P Morgan European Airlines Research

For the Network Carriers, pricing for Q2 could end up softer than expected on elevated capacity growth, a mixed demand backdrop by long-haul route/cabin, and any impact from LCC discounting/short-haul leisure weakness. Softer pricing in Q2 would come at a time when costs remain elevated for the Networks, and may call into question whether peak summer leisure demand will be strong enough to grow pricing in Q3 - see report from our Airlines analyst.

Recent commentary from the LCCs (low cost carriers) has also focused on a more mixed pricing outlook for short-haul leisure.

Economic surprise indices have turned negative in a number of key regions

Figure 29: Key regions CESIs

Source: Bloomberg Finance L.P.

Big picture, CESIs have turned negative in most key regions.

Table 4: MSCI Europe sectors relative performance when Euro Area CESI goes below 0 and stays negative for 2 months

Median 1m 3m 6m 12m
European Sectors relative Energy 0.9% 3.0% 5.8% 1.3%
Materials -1.0% 0.5% 1.5% 1.9%
Industrials 0.5% 0.4% 2.0% 4.3%
Discretionary 0.3% 0.4% -0.4% 3.1%
Autos -1.4% 0.4% 0.9% 6.0%
Consumer Durables 0.1% 0.4% 1.9% 3.9%
Retailing -1.2% 1.2% -0.2% 4.2%
Hotels,Restaurants&Leisure 0.6% 0.9% 0.1% 1.8%
Staples 0.8% 0.0% -0.8% 1.4%
Healthcare 1.0% 1.9% 0.0% 1.8%
Financials -1.9% -3.0% -0.2% -0.3%
Banks -1.0% -2.4% -1.0% -3.3%
IT 1.6% 2.1% 0.8% 4.3%
Telecoms -1.3% -3.6% -2.8% -6.5%
Utilities 0.3% 1.1% 1.3% -0.1%
Real Estate 0.9% -1.2% -1.0% -9.8%
Cyclicals Ex Tech vs Defensives -0.5% -0.6% 0.8% 3.6%

Source: Datastream, Bloomberg Finance L.P.

This tended to be a problem for Cyclical sectors, and also for Banks.

Table 5: MSCI Europe sectors relative performance when US CESI goes below 0 and stays negative for 2 months

Median 1m 3m 6m 12m
European Sectors relative Energy -0.5% 2.0% 3.5% -0.6%
Materials -1.9% -0.3% 2.5% 1.1%
Industrials 0.9% 1.3% 0.7% 2.5%
Discretionary 0.2% 0.5% -1.3% 2.3%
Autos 0.4% 0.9% -0.9% 0.2%
Consumer Durables 0.6% -0.1% 4.4% 9.5%
Retailing 0.4% 1.1% 2.1% 1.1%
Hotels,Restaurants&Leisure -0.2% -1.3% 0.8% -0.8%
Staples 0.8% 0.9% 0.1% 4.5%
Healthcare 0.9% -0.4% 1.3% 1.3%
Financials -0.1% -0.1% -1.3% -2.6%
Banks -0.1% -0.6% -3.4% -8.3%
IT 0.4% 0.7% 0.7% 2.1%
Telecoms 1.0% 0.1% -1.2% -2.2%
Utilities 0.0% -0.4% 2.5% 2.9%
Real Estate 0.4% -1.1% -4.0% -6.3%
Cyclicals Ex Tech vs Defensives -0.9% -1.3% -0.1% 0.7%

Source: Datastream, Bloomberg Finance L.P.

A similar trend is seen when US CESI turns negative, as well.

Figure 30: Banks Net interest income and ECB deposit rate

Source: J.P.Morgan

Now, Banks do look attractively priced, but they might end up cheap on peak earnings. Their earnings power is likely to move lower as rates come off.

Equity Strategy Key Calls and Drivers

SPW, an equal-weighted S&P500 index, has stalled since March, and is behind SPX so far this year by more than 10%. We think this is reflecting a changing Growth-Policy narrative vs early 2024. Entering this year, investor expectations were for a Goldilocks outcome – growth acceleration and at the same time quick Fed easing, starting already in March. The early Fed cuts and the consequent improving credit impulse didn’t materialize, which should weigh on growth in 2H. US activity momentum is slowing, with CESI outright negative at present, putting EPS growth projections of as much as 15% acceleration between Q1 and Q4 of this year at risk. Instead of easing preemptively for market-friendly reasons, such as falling inflation, as was the view at the start of the year, the Fed could end up easing, but reactively, in a response to weakening growth. At the same time, there is no safety net any more, the market is positioned long, Vix is at lows, potentially underpricing risks and credit spreads are extremely tight – this is as good as it gets. Adding to the picture strengthening USD and elevated political uncertainty currently, we arrive at a problematic setup for the equity market during summer. In terms of positioning, we have entered this year again OW Growth vs Value style and Large vs Small caps, and we are keeping these for 2H in the US, not expecting much broadening. The recent relative dip due to French political uncertainty is likely to become a buying opportunity as we move through 2H, but we think the risk of further drawdowns is not finished, as the potential new French government will likely try to test the limits of what they can do. Cyclicals were the best performing sectors in Q1, but struggled to outperform in Q2 . We reiterate our barbell of OW Defensives and Commodities.

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

Driver Impact Our Core Working Assumptions Recent Developments
Global Growth Neutral At risk of weakening as consumer strength wanes Global composite PMI is at 52.9
European Growth Positive reset last year, manufacturing improving, consumer can pick up  
Monetary Policy Neutral Fed pivot could be accompanied by activity weakness  
Currency Neutral USD could strengthen again  
Earnings Negative Corporate pricing power is likely to weaken from here 2024 EPS projections are continuing their downtrend
Valuations Negative At 21x, US forward P/E is still stretched, especially vs real yield  MSCI Europe on 13.7x Fwd P/E
Technicals Negative Sentiment and positioning are stretched post the rally since November RSIs are in overbought territory

Source: J.P. Morgan estimates

Table 7: : Base Case and Risk

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 '24
Target		 04-Jul-24 % upside
MSCI Eurozone 256 295 -13%
FTSE 100 7,700 8,241 -7%
MSCI EUROPE 1,850 2,078 -11%
DJ EURO STOXX 50 4,250 4,987 -15%
DJ STOXX 600 E 460 518 -11%

Source: J.P. Morgan.

Table 9: Key Global sector calls

Overweight Neutral Underweight
Healthcare Technology Capital Goods ex A&D
Telecoms Mining Food& Drug Retail
Food, Beverage & Tobacco Transportation Autos
Real Estate Banks
Utilities Discretionary
Energy
Aerospace & Defence

Source: J.P. Morgan

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

Sector Recommendations Key Drivers
Utilities Overweight Sector is low beta, has strong cash flow generation, resilient earnings, and power prices are higher than pre-Ukraine but P/E relative is near record cheap
Healthcare Overweight Potential for lower yields and stronger dollar are supports, better earnings
Staples Overweight Sector is one of the best performers around the last Fed hike in the cycle, lower bond yields and better relative EPS momentum should help
Banks Underweight 3 years of strong performance, NII likely peaking, central banks moving to cuts, underprovisioning
Autos Underweight Pricing and volume could come under pressure with rising inventories, increasing China competition and weaker demand
Chemicals Underweight The sector trades at 70% premium to the market, well above historical norm. pricing continues to deteriorate, downside risks to current earnings and margin projections

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

Region Recommendations J.P. Morgan Views
EM Neutral China tactical positive call since Q1, but structural concerns remain
DM Neutral  
    US Neutral Expensive with earnings risk. but our ytd Growth style OW helps
    Japan Overweight Large rate differential, TSE reforms, consumer reflation, but JPY needs to show stability
    Eurozone Neutral Eurozone growth differential bottoming, cheap
    UK Overweight Valuations 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

Market Cap EPS Growth Dividend Yield 12m Fwd P/E Performance
Name Ticker Sector Rating Price Currency (€ Bn) 23e 24e 25e 24e Current 10Y Median % Premium -3m -12m
ENI ENI IM Energy OW 15 E 48.1 -35% -14% 1% 6.3% 6.9 12.5 -45% -5% 8%
TOTALENERGIES TTE FP Energy OW 66 E 156.7 -33% -1% 2% 4.7% 7.6 10.6 -28% -2% 23%
SHELL SHEL LN Energy OW 34 E 215.8 -23% 1% 2% 3.5% 8.8 11.1 -21% 6% 22%
CRH PUBLIC LIMITED CRH LN Materials OW 73 U$ 46.0 -14% 25% 9% 1.8% 13.0 14.9 -13% -13% 34%
RIO TINTO RIO LN Materials OW 5359 £ 106.8 -11% 3% -1% 6.4% 9.2 10.3 -11% 5% 6%
NORSK HYDRO NHY NO Materials OW 68 NK 12.0 -60% 26% 39% 3.7% 10.5 12.6 -17% 0% 4%
ANGLO AMERICAN AAL LN Materials OW 2434 £ 35.4 -51% -14% 19% 3.1% 13.8 9.5 44% 15% 4%
SCHNEIDER ELECTRIC SU FP Industrials OW 231 E 132.7 2% 15% 13% 1.5% 26.0 16.5 57% 11% 43%
ASHTEAD GROUP AHT LN Industrials OW 5220 £ 27.2 26% - - 1.5% 16.3 14.1 16% -9% -3%
RYANAIR HOLDINGS RYA ID Industrials OW 16 E 18.7 - - - 0.0% 8.1 12.7 -37% -22% -5%
AIRBUS AIR FP Industrials OW 136 E 109.0 10% -13% 34% 1.3% 21.0 18.5 13% -19% 4%
MTU AERO ENGINES HLDG. MTX GR Industrials OW 255 E 13.8 24% 12% 14% 0.8% 19.2 18.1 6% 10% 10%
STELLANTIS STLAM IM Discretionary OW 18 E 55.5 12% -14% 4% 8.5% 3.5 4.7 -25% -27% 13%
BMW BMW GR Discretionary OW 88 E 56.4 -35% -7% 0% 6.8% 5.4 7.6 -29% -23% -
INDITEX ITX SM Discretionary OW 46 E 142.4 27% - - 2.6% 22.9 24.1 -5% -1% 29%
ADIDAS ADS GR Discretionary OW 219 E 39.7 -154% - 117% 0.3% 43.1 24.8 74% 10% 23%
RICHEMONT N CFR SW Discretionary OW 141 SF 85.8 78% - - 1.7% 20.0 20.8 -4% 2% -6%
COMPASS GROUP CPG LN Discretionary OW 2161 £ 43.4 50% 14% 10% 1.9% 21.4 20.9 2% -3% 0%
COLRUYT GROUP COLR BB Staples OW 45 E 5.8 -27% - - 1.8% 15.0 17.6 -15% 7% 29%
ANHEUSER-BUSCH INBEV ABI BB Staples OW 56 E 112.2 -5% 9% 13% 1.4% 17.0 19.4 -12% 1% 7%
NOVO NORDISK 'B' NOVOB DC Health Care OW 970 DK 581.8 52% 27% 24% 1.0% 36.7 22.8 61% 13% 80%
ASTRAZENECA AZN LN Health Care OW 12106 £ 222.2 9% 12% 14% 1.9% 17.6 17.7 0% 13% 14%
SMITH & NEPHEW SN/ LN Health Care OW 1054 £ 11.0 1% 12% 18% 2.8% 13.2 18.4 -28% 9% -12%
UBS GROUP UBSG SW Financials OW 27 SF 97.5 -99% 4327% 64% 2.3% 17.3 10.4 67% -4% 50%
NATWEST GROUP NWG LN Financials OW 326 £ 32.0 38% -19% 9% 5.2% 7.5 10.0 -25% 16% 35%
ING GROEP INGA NA Financials OW 17 E 54.8 106% -9% 8% 6.7% 8.4 9.0 -7% 6% 32%
INTESA SANPAOLO ISP IM Financials OW 4 E 65.5 79% 19% 4% 8.3% 7.5 10.0 -25% 6% 48%
LONDON STOCK EXCHANGE GROUP LSEG LN Financials OW 9274 £ 58.4 2% 10% 13% 1.2% 24.6 23.0 7% -1% 13%
AMUNDI (WI) AMUN FP Financials OW 64 E 13.2 4% 8% 7% 6.4% 9.7 12.6 -23% -2% 18%
DASSAULT SYSTEMES DSY FP IT N 35 E 47.6 6% 8% 9% 0.8% 25.9 31.7 -18% -11% -12%
ASML HOLDING ASML NA IT OW 984 E 397.5 41% -5% 60% 0.6% 40.0 27.3 47% 9% 47%
ASM INTERNATIONAL ASM NA IT OW 717 E 35.5 -8% 19% 35% 0.4% 43.8 16.7 163% 25% 86%
DEUTSCHE TELEKOM DTE GR Telecoms OW 24 E 118.9 -13% 14% 12% 3.2% 12.3 14.0 -12% 7% 19%
BT GROUP BT/A LN Telecoms OW 139 £ 16.4 9% - - 5.5% 7.7 8.7 -11% 31% 11%
RELX REL LN Industrials OW 3583 £ 79.4 12% 8% 9% 1.6% 27.9 19.4 44% 8% 38%
HELLOFRESH HFG GR Staples N 6 E 1.1 -49% -62% 138% 0.0% 15.1 18.6 -19% -6% -75%
RWE RWE GR Utilities OW 33 E 24.7 30% -55% -26% 3.0% 13.8 13.0 6% 6% -18%
ENEL ENEL IM Utilities OW 7 E 68.0 15% 10% 0% 6.5% 9.9 11.9 -17% 10% 5%
SEGRO SGRO LN Real Estate OW 907 £ 14.6 6% 6% 8% 3.1% 25.3 25.3 0% 3% 23%

Source: Datastream, MSCI, IBES, J.P. Morgan, Prices and Valuations as of COB 4th Jul, 2024. 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

Equity Flows Snapshot

Table 13: DM Equity Fund Flows Summary

Regional equity fund flows
$mn % AUM
1w 1m 3m ytd 12m 1w 1m 3m ytd 12m
Europe ex UK -109 -393 2,153 1,180 -6,860 0.0% -0.1% 0.6% 0.4% -2.2%
UK -857 -3,067 -8,580 -12,728 -27,899 -0.3% -1.1% -3.2% -4.6% -10.3%
US 6,348 27,479 90,128 114,257 270,631 0.1% 0.3% 0.9% 1.2% 3.2%
Japan -557 -9,624 3,919 12,247 25,473 -0.1% -1.2% 0.5% 1.6% 3.6%

Source: EPFR, as of 12th Jun, 2024

Figure 31: DM Equity Fund flows – last month

Source: EPFR, Japan includes BoJ purchases.

Figure 32: DM Equity Fund flows – last 12 months

Source: EPFR, Japan includes BoJ purchases.

Figure 33: Cumulative fund flows into regional funds as a percentage of AUM

Source: EPFR, as of 12th Jun, 2024. Japan includes Non-ETF purchases only.

Figure 34: Cumulative fund flows into regional equity ETFs as a percentage of AUM

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

Technical Indicators

Figure 35: S&P500 RSI

Source: Bloomberg Finance L.P.

Figure 36: EuroStoxx50 RSI

Source: Bloomberg Finance L.P.

Figure 37: AAII Bull-Bear

Source: Bloomberg Finance L.P

Figure 38: Put-call ratio

Source: Bloomberg Finance L.P.

Figure 39: Sentix Sentiment Index vs SX5E

Source: Bloomberg Finance L.P.

Figure 40: Equity Skew

Source: Bloomberg Finance L.P.

Figure 41: Speculative positions in S&P500 futures contracts

Source: Bloomberg Finance L.P.

Figure 42: VIX

Source: Bloomberg Finance L.P.

Performance

Table 14: Sector Index Performances — MSCI Europe

Source: MSCI, Datastream, as at COB 4th Jul, 2024.

Table 15: Country and Region Index Performances

(%change) Local Currency US$
Country Index 4week 12m YTD 4week 12m YTD
Austria ATX 1.1 15.8 8.1 0.4 14.8 5.7
Belgium BEL 20 1.0 11.2 6.7 0.4 10.2 4.4
Denmark KFX (1.0) 39.9 24.3 (1.6) 38.5 21.5
Finland HEX 20 (1.1) 0.6 0.1 (1.7) (0.3) (2.1)
France CAC 40 (4.3) 4.4 2.0 (4.9) 3.5 (0.2)
Germany DAX (1.1) 15.0 10.1 (1.7) 14.0 7.8
Greece ASE General (1.2) 10.5 11.0 (1.8) 9.5 8.6
Ireland ISEQ (3.9) 8.9 8.3 (4.5) 7.9 5.9
Italy FTSE MIB (2.1) 20.1 12.4 (2.7) 19.1 9.9
Japan Topix 5.1 25.7 22.5 1.8 12.6 7.1
Netherlands AEX 1.2 20.0 18.8 0.6 19.0 16.2
Norway OBX (0.6) 12.1 6.8 (0.4) 12.8 2.6
Portugal BVL GEN (2.7) (2.6) (5.8) (3.3) (3.5) (7.8)
Spain IBEX 35 (3.3) 15.4 9.5 (3.9) 14.4 7.2
Sweden OMX (1.5) 12.0 7.3 (2.2) 15.2 2.9
Switzerland SMI (1.4) 7.6 8.4 (2.3) 7.1 1.3
United States S&P 500 3.4 24.3 16.1 3.4 24.3 16.1
United States NASDAQ 5.9 31.6 21.2 5.9 31.6 21.2
United Kingdom FTSE 100 (0.5) 9.6 6.6 (0.6) 9.9 6.7
EMU MSCI EMU (2.0) 11.2 8.3 (2.6) 10.2 6.0
Europe MSCI Europe (1.4) 11.5 8.4 (2.0) 11.1 5.8
Global MSCI AC World 2.5 21.1 14.2 2.3 20.1 12.6

Source: MSCI, Datastream, as at COB 4th Jul, 2024.

Earnings

Table 16: IBES Consensus EPS Sector Forecasts — MSCI Europe

EPS Growth (%yoy)
2023 2024E 2025E 2026E
Europe (3.8) 4.3 10.1 9.1
Energy (31.6) (3.7) 2.2 3.2
Materials (39.0) 7.5 14.3 8.3
Chemicals (39.0) 23.7 18.9 13.0
Construction Materials 12.2 14.3 9.5 8.7
Metals & Mining (46.7) (4.6) 10.4 3.8
Industrials (0.6) 9.0 13.2 12.0
Capital Goods 20.4 12.1 15.0 11.9
Transport (56.0) (11.0) (0.5) 14.6
Business Svs 3.2 7.8 11.4 10.4
Discretionary 5.0 1.8 10.9 10.2
Automobile 1.9 (6.1) 6.4 6.6
Consumer Durables (6.0) 1.9 14.7 13.4
Media 1.8 6.1 9.4 8.3
Retailing 40.3 24.3 14.8 11.4
Hotels,Restaurants&Leisure 63.5 40.0 22.6 18.8
Staples 2.4 2.2 8.7 7.8
Food & Drug Retailing 3.7 2.4 10.0 9.3
Food Beverage & Tobacco 2.0 0.7 8.7 7.7
Household Products 2.9 6.2 8.0 7.4
Healthcare 1.1 6.4 14.6 10.9
Financials 15.8 8.3 7.6 8.8
Banks 28.8 3.6 4.4 6.8
Diversified Financials (20.2) 19.8 21.3 19.7
Insurance 11.4 14.7 8.1 7.2
Real Estate 5.6 2.7 4.1 4.3
IT 14.4 (10.2) 33.7 16.0
Software and Services 18.5 (5.9) 24.1 16.8
Technology Hardware (19.1) 8.7 7.5 10.6
Semicon & Semicon Equip 27.9 (18.6) 51.0 17.2
Telecoms (8.5) 9.5 10.6 10.6
Utilities 1.9 (0.2) 0.4 3.9

Source: IBES, MSCI, Datastream. As at COB 4th Jul, 2024.

Table 17: IBES Consensus EPS Country Forecasts

EPS growth (%change)
Country Index 2023 2024E 2025E 2026E
Austria ATX (23.6) 6.7 4.2 5.1
Belgium BEL 20 14.4 (5.0) 15.5 12.1
Denmark Denmark KFX (14.9) 32.1 18.0 16.6
Finland MSCI Finland (25.2) 0.8 13.8 8.8
France CAC 40 (2.4) 0.8 9.4 8.1
Germany DAX 0.2 0.8 12.5 11.0
Greece MSCI Greece 15.1 (6.8) 3.4 10.3
Ireland MSCI Ireland 33.8 0.4 2.9 6.5
Italy MSCI Italy 8.9 0.4 3.5 5.0
Netherlands AEX (2.0) 2.1 12.8 8.8
Norway MSCI Norway (41.3) 5.3 5.2 1.0
Portugal MSCI Portugal 16.9 17.0 0.4 7.7
Spain IBEX 35 8.2 4.9 4.1 5.9
Sweden OMX 31.9 1.6 8.7 7.1
Switzerland SMI (4.5) 11.7 12.6 10.4
United Kingdom FTSE 100 (10.6) 1.1 8.3 7.9
EMU MSCI EMU 3.0 3.6 10.6 9.2
Europe ex UK MSCI Europe ex UK (0.1) 5.3 10.9 9.5
Europe MSCI Europe (3.8) 4.3 10.1 9.1
United States S&P 500 2.5 10.7 14.6 12.3
Japan Topix 18.1 8.0 10.4 8.6
Emerging Market MSCI EM (6.5) 21.6 15.9 11.0
Global MSCI AC World 0.1 10.0 13.4 11.1

Source: IBES, MSCI, Datastream. As at COB 4th Jul, 2024** 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/E Dividend Yield EV/EBITDA Price to Book
2024e 2025e 2026e 2024e 2025e 2026e 2024e 2025e 2026e 2024e 2025e 2026e
Europe 14.4 13.1 12.0 3.3% 3.5% 3.8% 8.2 7.7 7.1 2.0 1.8 1.7
Energy 8.0 7.8 7.6 5.3% 5.2% 5.4% 3.5 3.4 3.3 1.2 1.1 1.1
Materials 16.1 14.1 13.0 3.2% 3.5% 3.7% 7.7 6.8 6.5 1.7 1.6 1.5
Chemicals 23.9 20.1 17.8 2.7% 2.9% 3.0% 11.7 10.6 9.6 2.3 2.2 2.1
Construction Materials 13.0 11.8 10.9 3.5% 3.8% 4.2% 6.9 6.2 5.7 1.4 1.3 1.2
Metals & Mining 11.3 10.2 9.9 3.7% 4.2% 4.5% 5.2 4.4 4.4 1.3 1.2 1.1
Industrials 20.1 17.7 15.8 2.3% 2.5% 2.8% 10.4 9.4 8.6 3.4 3.1 2.9
Capital Goods 20.0 17.4 15.6 2.2% 2.4% 2.7% 11.1 9.6 8.8 3.5 3.2 2.9
Transport 16.1 16.1 14.1 3.1% 3.2% 3.3% 6.7 6.9 6.3 1.9 1.8 1.7
Business Svs 23.3 20.9 19.0 2.3% 2.5% 2.7% 13.1 12.3 11.2 6.6 6.0 5.5
Discretionary 13.1 11.8 10.7 2.8% 3.1% 3.4% 5.1 5.0 4.6 1.9 1.7 1.5
Automobile 5.9 5.5 5.2 5.6% 5.9% 6.3% 1.8 1.6 1.7 0.7 0.6 0.6
Consumer Durables 23.6 20.6 18.1 1.8% 2.1% 2.3% 13.9 12.6 11.3 4.0 3.6 3.3
Media & Entertainment 17.2 15.8 14.5 2.4% 2.6% 2.7% 12.1 9.7 9.2 2.0 2.1 1.9
Retailing 16.2 14.1 12.6 2.4% 2.5% 2.8% 7.1 10.2 7.5 3.6 3.1 2.7
Hotels,Restaurants&Leisure 23.3 19.0 16.0 2.0% 2.6% 2.9% 12.2 10.4 9.4 4.5 4.1 3.6
Staples 16.9 15.5 14.4 3.2% 3.4% 3.6% 10.7 10.0 9.2 2.8 2.7 2.5
Food & Drug Retailing 11.3 10.3 9.4 4.4% 4.7% 5.0% 5.7 5.6 5.3 1.5 1.5 1.4
Food Beverage & Tobacco 16.5 15.1 14.1 3.5% 3.7% 4.0% 10.5 9.8 9.0 2.5 2.4 2.3
Household Products 20.1 18.7 17.4 2.4% 2.6% 2.8% 13.9 12.9 11.9 4.2 4.0 3.6
Healthcare 18.9 16.5 14.9 2.3% 2.5% 2.8% 12.8 11.7 10.1 3.7 3.4 3.0
Financials 9.2 8.6 7.9 5.5% 5.6% 6.0% - - - 1.1 1.1 1.0
Banks 7.4 7.1 6.6 7.0% 6.9% 7.4% - - - 0.8 0.8 0.7
Diversified Financials 14.9 12.3 10.2 2.3% 2.6% 2.9% - - - 1.4 1.5 1.5
Insurance 10.7 9.9 9.2 5.6% 6.0% 6.4% - - - 1.7 1.6 1.5
Real Estate 14.6 14.0 13.4 4.1% 4.3% 4.5% - - - 0.9 0.8 0.8
IT 34.5 25.8 22.2 1.1% 1.2% 1.4% 20.5 15.6 13.6 5.5 4.9 4.4
Software and Services 33.4 26.9 23.0 1.3% 1.4% 1.5% 20.3 16.1 13.9 4.6 4.2 3.8
Technology Hardware 16.9 15.7 14.2 2.3% 2.5% 2.8% 9.3 8.8 7.5 2.1 1.9 1.8
Semicon & Semicon Equip 42.4 28.1 24.0 0.7% 0.9% 1.0% 26.1 17.6 15.4 9.6 8.1 6.8
Communication Services 14.9 13.4 12.1 4.3% 4.3% 4.6% 6.6 6.2 5.7 1.5 1.4 1.4
Utilities 12.3 12.3 11.8 5.1% 5.1% 5.3% 8.0 8.1 8.0 1.5 1.5 1.4

Source: IBES, MSCI, Datastream. As at COB 4th Jul, 2024.

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

P/E Dividend Yield
Country Index 12mth Fwd 2024E 2025E 2026E 12mth Fwd
Austria ATX 8.1 8.2 7.9 7.4 5.8%
Denmark Denmark KFX 27.3 29.8 25.3 21.7 1.5%
Finland MSCI Finland 14.9 15.9 14.0 12.9 4.4%
France CAC 40 12.6 13.2 12.1 11.2 3.5%
Germany DAX 11.9 12.7 11.3 10.2 3.4%
Greece MSCI Greece 29.4 30.0 29.0 26.2 1.9%
Ireland MSCI Ireland 10.8 11.0 10.6 10.0 3.7%
Italy MSCI Italy 9.1 9.2 8.9 8.5 5.6%
Netherlands AEX 15.9 16.9 15.0 13.8 2.4%
Norway MSCI Norway 10.3 10.6 10.1 10.0 6.4%
Portugal MSCI Portugal 14.8 14.9 14.8 13.8 3.9%
Spain IBEX 35 10.8 11.0 10.5 10.0 4.8%
Sweden OMX 14.7 15.4 14.1 13.3 3.8%
Switzerland SMI 17.0 18.0 16.0 14.5 3.2%
United Kingdom FTSE 100 11.4 11.8 10.9 10.1 4.0%
EMU MSCI EMU 13.0 13.7 12.4 11.4 3.5%
Europe ex UK MSCI Europe ex UK 14.5 15.3 13.8 12.6 3.3%
Europe MSCI Europe 13.7 14.4 13.1 12.0 3.5%
United States S&P 500 21.4 23.1 20.2 18.0 1.4%
Japan Topix 15.4 15.8 14.3 13.2 2.3%
Emerging Market MSCI EM 12.3 13.2 11.6 10.3 2.9%
Global MSCI AC World 17.8 19.0 17.0 15.1 2.0%

Source: IBES, MSCI, Datastream. As at COB 4th Jul, 2024; ** 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 GDP Real GDP Consumer prices
% oya % over previous period, saar % oya
2023E 2024E 2025E 4Q23 1Q24 2Q24E 3Q24E 4Q24E 1Q25E 4Q23 2Q24E 4Q24E 2Q25E
United States 2.5 2.3 1.7 3.4 1.4 2.0 1.0 1.0 2.0 3.2 3.3 3.0 2.4
Eurozone 0.6 0.8 1.1 -0.2 1.3 1.5 1.5 1.0 1.0 2.7 2.5 2.5 2.2
United Kingdom 0.1 1.0 0.8 -1.2 2.9 2.0 1.0 1.0 0.8 4.2 2.1 2.4 2.7
Japan 1.8 -0.1 0.7 0.4 -1.8 1.5 1.0 0.8 0.6 2.9 2.6 2.6 3.0
Emerging markets 4.2 4.2 3.6 4.1 6.1 3.0 3.5 3.5 3.4 3.7 3.5 3.5 3.2
Global 2.8 2.6 2.3 2.7 3.2 2.2 2.2 2.1 2.3 3.4 3.4 3.1 2.8

Source: J.P. Morgan economic research J.P. Morgan estimates, as of COB 28th Jun, 2024

Table 21: Official Rates Outlook

Forecast for
Official interest rate Current Last change (bp) Forecast next change (bp) Sep 24 Dec 24 Mar 25 Jun 25
United States Federal funds rate 5.50 26 Jul 23 (+25bp) Nov 24 (-25bp) 5.50 5.25 5.00 4.75
Eurozone Depo rate 3.75 6 Jun 24 (-25bp) Sep 24 (-25bp) 3.50 3.25 3.00 2.50
United Kingdom Bank Rate 5.25 03 Aug 23 (+25bp) Aug 24 (-25bp) 5.00 4.75 4.50 4.25
Japan Pol rate IOER 0.10 19 Mar 24 (+20bp) 3Q24 (+15bp) 0.25 0.50 0.50 0.75

Source: J.P. Morgan estimates, Datastream, as of COB 28th Jun, 2024

Table 22: 10-Year Government Bond Yield Forecasts

10 Yr Govt BY Forecast for end of
5-Jul-24 Sep 24 Dec 24 Mar 25 Jun 25
US 4.34 4.50 4.40 4.20 4.00
Euro Area 2.59 2.40 2.20 2.10 2.00
United Kingdom 4.16 4.10 3.95 3.85 3.75
Japan 1.08 1.20 1.45 1.45 1.60

Source: J.P. Morgan estimates, Datastream, forecasts as of COB 28th Jun, 2024

Table 23: Exchange Rate Forecasts vs. US Dollar

Exchange rates vs US$ Forecast for end of
4-Jul-24 Oct 24 Jan 25 Apr 25 Jul 25
EUR 1.08 1.05 1.09 1.12 1.12
GBP 1.28 1.25 1.31 1.35 1.35
CHF 0.90 0.94 0.92 0.89 0.89
JPY 161 157 156 155 154
DXY 105.1 107.1 103.7 101.3 101.1

Source: J.P. Morgan estimates, Datastream, forecasts as of COB 28th Jun, 2024

Sector, Regional and Asset Class Allocations

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

MSCI Europe Weights Allocation Deviation Recommendation
Energy 5.6% 8.0% 2.4% OW
Materials 7.0% 6.0% -1.0% N
Chemicals UW
Construction Materials N
Metals & Mining N
Industrials 15.8% 14.0% -1.8% N
Capital Goods ex Aerospace & Defence UW
Aerospace & Defence OW
Transport N
Business Services N
Consumer Discretionary 9.1% 7.0% -2.1% UW
Automobile UW
Consumer Durables N
Consumer Srvcs UW
Speciality Retail UW
Internet Retail UW
Consumer Staples 11.7% 13.0% 1.3% OW
Food & Drug Retailing UW
Beverages OW
Food & Tobacco OW
Household Products OW
Healthcare 16.0% 18.0% 2.0% OW
Financials 18.1% 14.0% -4.1% UW
Banks UW
Insurance N
Real Estate 0.9% 2.0% 1.1% OW
Information Technology 7.1% 7.0% -0.1% N
Software and Services N
Technology Hardware N
Semicon & Semicon Equip UW
Communication Services 4.5% 5.0% 0.5% OW
Telecommunication Services OW
Media N
Utilities 4.4% 6.0% 1.6% 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 Weight Allocation Deviation Recommendation
EM 10.0% 10.0% 0.0% Neutral
DM 90.0% 90.0% 0.0% Neutral
US 70.9% 68.0% -2.9% Neutral
Japan 6.2% 8.0% 1.8% Overweight
Eurozone 8.6% 8.0% -0.6% Neutral
UK 3.8% 6.0% 2.2% Overweight
Others* 10.5% 10.0% -0.5% Neutral
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 Weight Allocation Deviation Recommendation
Eurozone 51.0% 48.0% -3.0% Neutral
United Kingdom 22.6% 25.0% 2.4% Overweight
Others** 26.5% 27.0% 0.5% Overweight
100.0% 100.0% 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
Equities 60% 55% -5% Underweight
Bonds 30% 35% 5% Overweight
Cash 10% 10% 0% Neutral
100% 100% 0% Balanced

Source: MSCI, J.P. Morgan

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

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Completed 07 Jul 2024 11:01 PM BSTDisseminated 08 Jul 2024 03:00 AM BST