Equity Research
Equity Strategy : Closing the OW US vs Eurozone trade
March 18, 2024
Equity Strategy : Closing the OW US vs Eurozone trade
Equity Strategy : Closing the OW US vs Eurozone trade
18 March 2024

Equity Strategy

Closing the OW US vs Eurozone trade

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Post the 30%+ outperformance in USD terms seen early last year, Eurozone has lagged the US since May ‘23

Eurozone is trading at sector neutral P/E discount to the US that is at past pre-COVID extremes

Eurozone outperformance a year ago coincided with better growth momentum, and underperformance with a weaker one… Eurozone activity momentum appears to be moving above the US again

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

  • Eurozone had a big rebound vs the US around a year ago, of 30%+ in USD terms - see top chart, driven by our view at the time of easing in gas prices on ample supply, among other. We have cut Eurozone to UW vs the US in early May of 2023, and had a preference for the US since. We are now closing the US over Eurozone OW, for the following reasons:
  • 1. As per top chart, Eurozone has lagged in the past few quarters, losing 14% relative since May, and had relative outflows - in 41 out of the past 52 wks, and in 7 out of the past 10 wks ytd. At 13.3x forward, it is trading cheap vs the US, which is now on 21x. Even if one were to look at sector neutral P/E rating of Eurozone vs the US, it is trading the cheapest vs any time pre COVID. In absolute terms, Eurozone valuations are fair value vs historical median of 13x PE, and fair value vs fixed income. On both counts, US is more stretched.
  • 2. We had a preference for Growth over Value style through 2023 and again this year. Even as we stay with this tilt, we note that Growth style has already performed exceptionally well, it is trading stretched and is at risk of a reversal, given the MOMO concentration. Of course, within Europe there is also an increasing risk of MOMO unwind, but the magnitude of the potential impact would always be greater for the US market.
  • 3. In terms of activity momentum, Eurozone had a clear weakening through last year and especially relative to the US - see bottom chart. Even as we are skeptical with respect to the size and duration of the potential rebound, the relative growth disappointments of the region might have peaked, as seen in improving relative CESIs.
  • 4. While ECB typically takes its cue from the Fed, there is a chance that it moves ahead of the US this time around.
  • 5. We have been cautious on China over the past year from a global allocation perspective, but have a tactically more positive Chinacall, and if this continues tracking, it could indirectly help Eurozone.
  • We are neutralizing the US vs Eurozone preference, but not reversing. This is because the potential for a market drawdown is elevated, in our view, with Goldilocks fully in the price. The risks are on both sides of this narrow path: either to growth disappointing, as seen in latest IFO, ISM, retail sales and US small business confidence, and also from inflation potentially staying too hot, as seen in the US 1-year inflation swaps approaching October highs. In addition, the earnings of Growth style keep beating Value, and US earnings likewise are so far delivering better vs Eurozone. Finally, US politics could potentially turn into a headwind for international markets later on in the year. If markets weaken from here, Eurozone is very unlikely to outperform, but equally the much more attractive P/E multiples in the region relative to clearly stretched US P/E multiples could offer some cushion, at least in relative terms.
  • What is attractive in Euro Area? We note that every single Eurozone level 1 sector is trading at a greater than historical discount vs the US.

Closing the OW US vs Eurozone trade

Post the strong start to ‘23, Eurozone equities have lagged the US since May

Figure 1: MSCI Eurozone vs MSCI US

Source: Datastream

We held an upbeat view on Eurozone equities since Q4 ‘22, before downgrading the region to outright Underweight in our regional portfolio in May of last year. Our bullish view on Eurozone at the time was driven by the call that gas prices were set to fall, by China reopening, and by what was the extremely cautious positioning on the region at the end of 2022. We downgraded Eurozone in May ‘23, on the back of the view that activity momentum was set to weaken, with Eurozone equities underperforming US by 14% in dollar terms since.

We are now closing the US vs Eurozone preference: 1) Eurozone has lagged, it saw outflows, and is attractively priced vs the US

Figure 2: Cumulative fund flows into regional funds, as % of AUM

Source: EPFR

Apart from the renewed underperformance in the past few quarters, Eurozone equities have seen meaningful outflows, which contrasts to the US inflows.

Figure 3: Europe ex UK weekly flows

Source: EPFR

In the past 52 weeks, Eurozone saw outflows for 41 weeks, and ytd it saw 7 out of 10 weeks of outflows.

Figure 4: MSCI Eurozone 12m Fwd P/E rel to US

Source: Datastream

In terms of valuations, Eurozone equities are trading at a discount of almost 40% versus the US, a greater than 20% discount seen in the past.

Figure 5: Eurozone Sector Neutral P/E relative to US

Source: Datastream

Even adjusted for sector biases, Eurozone screens attractive. On sector neutral P/E, it is trading at one of the cheapest P/E relatives seen in pre-COVID times.

Figure 6: MSCI Eurozone 12m Fwd. P/E

Source: Datastream

In absolute terms, Eurozone 12m Fwd P/E at 13.3x is broadly in line with its long-term history.

Table 1: DM Yield Gap for key regions

Dividend yield 10Y Bond yield Dividend yield minus bond yield Average since '00 Current vs Average (bp)
US 1.4% 4.3% -2.9% -1.4% -152
Japan 2.0% 0.8% 1.2% 0.9% 30
Eurozone 3.1% 2.9% 0.1% 0.4% -29
UK 3.9% 4.1% -0.1% 0.6% -72

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

Relative to the bond yields, Eurozone is not far from fair value. The US, in contrast, is outright expensive, in our view. At 3.1%, Eurozone dividend yield is meaningfully above the US.

Figure 7: Europe and US Buyback yield

Source: Bloomberg Finance L.P.

In addition, we note that the buyback yield in Europe is now not very different from the US. Adding dividend yield to buybacks, European total yield is at present meaningfully higher than in the US.

Table 2: Key regions P/E - Current vs Median

12m Fwd PE
Current Median Current vs Median
US 21.0 15.6 35%
Switzerland 18.1 15.0 21%
World 18.5 15.6 19%
France 14.6 13.2 11%
Eurozone 13.3 13.0 2%
EM 12.2 12.1 1%
Germany 12.1 13.0 -7%
UK 11.1 12.6 -12%
Spain 10.2 11.9 -14%
Japan 15.3 18.0 -15%
Italy 9.0 13.2 -31%

Source: IBES, median since 1988

US equities look stretched in a historical context on P/E metrics, while Eurozone is not.

2) We favoured Growth vs Value style, but the risk of a reversal is increasing

Figure 8: MSCI US and Europe Growth vs Value

Source: Datastream

We held a preference for Growth over Value style in 2023, and again ytd.

Figure 9: SXXP, SPX and TPX Momentum Index

Source: Bloomberg Finance L.P.

We fundamentally stay with the Growth over Value preference, but note the risk of a reversal is increasing, as the momentum trade has been very strong. The long momentum basket is outperforming the short leg by over 11% in the US, by 8.4% Eurozone, and by 8.9% in Japan.

Figure 10: Mag 7 share of S&P500 market cap

Source: Datastream

The market concentration is becoming very unhealthy, and could unwind.

Figure 11: GRANOLAS share of Stoxx 600 market cap

Source: Datastream

Concentration risk is high in Eurozone as well. A reversal in momentum factor performance, and a potential unwind in concentration, could be a problem for the Eurozone as well, but on a relative basis US equities will likely see a greater negative impact.

3) Relative growth momentum for Eurozone is starting to improve

Figure 12: Eurozone and US FRI

Source: Bloomberg Finance L.P.

The US economy enjoyed much stronger growth over the last year, while Eurozone growth projections were consistently downgraded.

Figure 13: S&P500 vs Stoxx600 EPS Growth and relative PMI

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

This supported the better showing of US vs Eurozone earnings.

Figure 14: Eurozone and US CESI

Source: Bloomberg Finance L.P.

The rebound in Eurozone CESIs at the start of last year helped the equity market outperformance, while the weakness post May has been a drag. We note that Eurozone CESI appears to be moving above the US again.

4) There is a chance that ECB starts easing ahead of the Fed

Figure 15: ECB and Fed policy rate

Source: Bloomberg Finance L.P.

Typically, the ECB policy decisions would follow the Fed lead. That could change this time around.

Figure 16: ECB and Fed market expected change - Jan ’24 vs Current

Source: Bloomberg Finance L.P.

Relative to the peak dovishness point in early January, where the Fed was projected to ease by more than the ECB this year, now the ECB is expected to act more aggressively.

5) Any recovery in China could indirectly help Eurozone

Figure 17: MSCI China

Source: Datastream

Eurozone is more leveraged to China than is the US, and this has contributed to Eurozone’s weaker showing relative to the US. China could trade better in the near term given its nearly 40% underperformance and very light positioning. Our China strategists have a constructive view on the market. The key arguments they highlight in favour of China equities are the budget deficit having surprised to the upside, the Rmb 1trn special CGB scheme, and the lifting of the debt ceiling program.

Table 3: Chinese key macro-economic data

Jan-23 Feb-23 Mar-23 Apr-23 May-23 Jun-23 Jul-23 Aug-23 Sep-23 Oct-23 Nov-23 Dec-23 Jan-24 Feb-24
Manufacturing PMI
Caixan 49.2 51.6 50.0 49.5 50.9 50.5 49.2 51.0 50.6 49.5 50.7 50.8 50.8 50.9
NBS 50.1 52.6 51.9 49.2 48.8 49.0 49.3 49.7 50.2 49.5 49.4 49.0 49.2 49.1
Services PMI
Caixan 52.9 55.0 57.8 56.4 57.1 53.9 54.1 51.8 50.2 50.4 51.5 52.9 52.7 52.5
NBS 54.4 56.3 58.2 56.4 54.5 53.2 51.5 51.0 51.7 50.6 50.2 50.4 50.7 51.4
Composite PMI - Caixan 51.1 54.2 54.5 53.6 55.6 52.5 51.9 51.7 50.9 50.0 51.6 52.6 52.5 52.5
Industry
Electricity Production, %oya - - 5.1% 6.1% 5.6% 2.8% 3.6% 1.1% 7.7% 5.2% 8.4% 8.0%
IP, %oya - - 3.9% 5.6% 3.5% 4.4% 3.7% 4.5% 4.5% 4.6% 6.6% 6.8%
FAI, %oya - 5.5% 5.1% 4.7% 4.0% 3.8% 3.4% 3.2% 3.1% 2.9% 2.9% 3.0%
Consumer Activity
Retail Sales, %oya - - 10.6% 18.4% 12.7% 3.1% 2.5% 4.6% 5.5% 7.6% 10.1% 7.4%
Passenger Car Sales, %yoy -32.8% 11.1% 8.2% 87.7% 26.4% 2.1% -3.4% 6.9% 6.7% 11.5% 25.5%
70-city house price index, %oya -2.3% -1.9% -1.4% -0.7% -0.5% -0.4% 0.6% -0.6% -0.6% -0.6% -0.7%
Liquidity & Monetary Conditions
M2, %oya 12.6% 12.9% 12.7% 12.4% 11.6% 11.3% 10.7% 10.6% 10.3% 10.3% 10.0% 9.7% 8.7%
FX Reserves (bln yuan) 3184 3133 3184 3205 3177 3193 3204 3160 3115 3101 3172 3238 3219 3226
New Loan Creation (bln yuan) 4900 1812 3890 719 1360 3050 346 1358 2312 738 1089 1171 4920

Source: Bloomberg Finance L.P.

China macro data has been disappointing over the past year, but could start to stabilize. PMI indicators are broadly back above the 50- pt threshold.

Figure 18: MSCI China 12m Fwd P/E relative

Source: Datastream

MSCI China screens attractive at 9x forward P/E, trading record cheap vs MSCI World. The longer-term issue is whether the current tactical bounce could turn into sustained outperformance, which we have reservations over.

Why not go OW Eurozone vs the US?

We are neutralizing the Eurozone vs US trade, but we are not recommending to go outright OW Eurozone vs the US. The reason for this is because the risk of a broader market drawdown is elevated, in our view.

Figure 19: Recession probability indicator

Source: J.P.Morgan

The Goldilocks narrative is fully consensus at present, with complacency with respect to the economic outlook among investors. Implied recession odds are at record lows, which might be too optimistic.

Figure 20: US ISM Manufacturing

Source: Bloomberg Finance L.P.

It is not clear to us that activity momentum is clearly bottoming. ISM manufacturing, for example, has turned back lower again.

Figure 21: US Retail sales control group

Source: Bloomberg Finance L.P.

US retail sales are softening.

Figure 22: NFIB small business optimism

Source: J.P.Morgan

US small business confidence is staying weak, too.

Figure 23: German IFO

Source: Bloomberg Finance L.P.

In Europe, German IFO has been struggling for direction in the last months.

Figure 24: : European Cyclicals vs Defensives 12m Fwd EPS vs IFO

Source: IBES, Bloomberg Finance L.P.

This is a risk for Cyclical sector earnings.

Figure 25: Regional correlation to Global Composite PMI

Source: Datastream, J.P. Morgan

While Eurozone could play catchup given its meaningful underperformance, the potential for a sustained rebound is likely to be capped if the macro backdrop underwhelms.

Figure 26: US Core Goods PPI

Source: Bloomberg Finance L.P.

At the same time, inflation has been increasing again of late.

Figure 27: US 1-year inflation swap

Source: Bloomberg Finance L.P.

Indeed, US 1-year inflation swaps are closing in on the October 2023 highs.

Figure 28: Fed vs SPX

Source: Bloomberg Finance L.P.

Given the above, equity markets could have a drawdown over the next months both because of growth disappointments, and also due to continued sticky inflation prints and higher for longer Fed; ie, we might end up with the opposite from Goldilocks.

Figure 29: US Elections - for president - betting odds

Source: RedClearPolitics

As we approach the US elections in November of this year, a potential trade war uncertainty could weigh on markets generally and on International in particular.

Figure 30: MSCI World Growth vs Value 12m Fwd EPS

Source: IBES

Growth factor performance has thus far been supported by the strong earnings momentum, which has benefitted US over Europe trade. While we see the risks of this changing, especially given that the US large cap earnings could turn to be more cyclical than structural, so far the turn has not arrived. The improvement on any of the above would be a next step for us in considering to going outright OW Eurozone vs the US.

What is attractive within Eurozone?

Table 4: MSCI Eurozone vs US - L1 sectors 12m Fwd. P/E

12m Fwd PE
Eurozone US Eurozone vs US
Real Estate 11.4 36.2 -69%
Discretionary 12.4 25.7 -52%
Financials 8.3 15.3 -46%
Energy 7.2 12.6 -42%
Market 13.3 21.0 -37%
Utilities 11.7 15.4 -24%
Healthcare 14.3 18.9 -24%
Telecoms 14.8 18.9 -22%
Industrials 17.0 21.3 -20%
Materials 16.4 20.3 -19%
Staples 18.7 19.8 -5%
IT 29.4 28.5 3%

Source: IBES

At index level, Eurozone equities are trading at close to a 40% discount relative to their US peers. Nearly every Eurozone sector is trading cheaper than its US counterpart, with the highest discount seen in Energy, Financials, Discretionary and Real Estate.

Table 5: MSCI Eurozone vs US - L2 sectors 12m Fwd. P/E

12m Fwd PE
Eurozone US Eurozone vs US
Cons Mat 8.2 29.1 -72%
Automobile 6.3 20.1 -69%
Real Estate 11.4 36.2 -69%
Met&Min 6.0 16.5 -64%
Tech Hardware 9.7 22.9 -58%
Food Drug Ret 10.5 24.2 -56%
Retailing 15.6 30.5 -49%
Transport 12.0 21.4 -44%
Energy 7.2 12.6 -42%
Banks 6.6 11.1 -40%
Market 13.3 21.0 -37%
Div Fin 12.4 19.2 -36%
Prof. Services 18.1 27.3 -34%
Insurance 9.9 13.4 -26%
Utilities 11.7 15.4 -24%
Healthcare 14.3 18.9 -24%
Hotels,Rest&Leis 21.6 27.1 -20%
Cap Goods 17.5 20.3 -14%
Software 29.6 32.5 -9%
Chemicals 20.4 21.5 -5%
Food Bev&Tob 17.4 16.5 5%
Semicon 31.6 29.3 8%
HPC 28.7 23.5 22%
Telecoms 14.7 9.4 57%
Cons Durables 28.8 17.1 69%

Source: IBES

At level 2, the majority of Eurozone sectors are trading at a discount to the US.

Table 6: MSCI Eurozone vs US - current vs historical median

12m Fwd PE
Eurozone vs US Current Median Current vs Median
IT 1.03 1.06 -2%
Staples 0.95 1.00 -5%
Materials 0.81 0.86 -6%
Industrials 0.80 0.89 -11%
Telecoms 0.78 0.91 -14%
Utilities 0.76 0.89 -15%
Healthcare 0.76 0.94 -19%
Market 0.63 0.81 -22%
Energy 0.58 0.76 -24%
Discretionary 0.48 0.67 -27%
Real Estate 0.31 0.47 -33%
Financials 0.54 0.82 -34%

Source: IBES, Median since 1995

Relative to the historical discount, every single European sector is trading at least as much or more attractive.

Table 7: Eurozone vs US 12m Fwd PE: Current vs long term average

12m Fwd PE
Eurozone vs US Current Median Current vs Median
Telecoms 1.57 1.08 45%
Cons Durables 1.69 1.25 35%
HPC 1.23 1.14 8%
Food Bev&Tob 1.06 1.01 4%
Chemicals 0.95 0.92 4%
Cap Goods 0.86 0.88 -2%
Software 0.91 1.00 -9%
Semicon 1.08 1.26 -14%
Utilities 0.76 0.89 -15%
Hotels,Rest&Leis 0.80 0.95 -16%
Insurance 0.74 0.89 -16%
Healthcare 0.76 0.94 -19%
Prof. Services 0.66 0.84 -21%
Market 0.63 0.81 -22%
Energy 0.58 0.76 -24%
Div Fin 0.64 0.86 -25%
Banks 0.60 0.89 -33%
Real Estate 0.31 0.47 -33%
Transport 0.56 0.94 -40%
Food Drug Ret 0.44 0.86 -50%
Met&Min 0.36 0.72 -50%
Retailing 0.51 1.04 -51%
Cons Mat 0.28 0.58 -51%
Tech Hardware 0.43 0.98 -57%
Automobile 0.31 0.81 -61%

Source: IBES, median since 1995

Table 7 shows the discount vs historical for level 2 subsectors.

Equity Strategy Key Calls and Drivers

So far this year, US and Japan are ahead of other markets, Growth is outperforming Value and large caps are again beating small in all key regions. We continue to believe that this, ultimately unhealthy, high concentration and narrow leadership is set to stay for a while longer. To buy Value and International stocks one needs to see a reflationary backdrop, in our view, but we could have the opposite. in terms of bond yields, we argued last October to go long duration, but also in January to look for a tactical bounce back in bond yields, as Fed easing became overdiscounted in markets. We now think that the counter-rally in yields might be running out of steam, and would advocate to go long duration again. The move back higher in Fed futures might be getting done – they round-tripped back to October levels, and activity momentum could soften from here. The question is, why didn’t equities weaken as US 10-year yields backed up 50bp during Jan-Feb? We think that this is because investors assumed that the yield upmove is reflective of economic acceleration, but we note that earnings projections for 2024 are not reacting positively – they keep coming down in most sectors. If the growth acceleration does not come through, this could act as a headwind. We close UW Eurozone vs US trade, as relative growth disappointments for the region are likely at their peak and growth style in US is at a risk of a reversal given it is already so stretched.

Table 8: 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 52.1
European Growth Negative Manufacturing and services are converging on the downside; industry data stays weak  
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 13.8x Fwd P/E
Technicals Negative Sentiment and positioning are stretched post the Nov-Dec rally RSIs are in overbought territory

Source: J.P. Morgan estimates

Table 9: : 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 10: Index targets

Dec '24
Target		 14-Mar-24 % upside
MSCI Eurozone 256 293 -13%
FTSE 100 7,700 7,743 -1%
MSCI EUROPE 1,850 2,034 -9%
DJ EURO STOXX 50 4,250 4,993 -15%
DJ STOXX 600 E 460 506 -9%

Source: J.P. Morgan.

Table 11: Key Global sector calls

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

Source: J.P. Morgan

Table 12: J.P. Morgan Equity Strategy — Key sector calls*

Sector Recommendations Key Drivers
Healthcare Overweight Potential for lower yields and stronger dollar remain near term support, earnings are also holding up
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 further support
Banks Underweight Downgraded to UW in October after 3 years of strong performance. Bond yields and PMIs direction is the key for the potential P/E re-rating of the sector, we think both will move lower
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 13: J.P. Morgan Equity Strategy — Key regional calls

Region Recommendations J.P. Morgan Views
EM Neutral China tactical chance for a bounce, but structural bearish call remains
DM Neutral  
    US Neutral Expensive, with earnings risk. Growth style at a risk of reversal.
    Japan Overweight Japan is attractively priced; diverging policy path and TSE reforms are tailwinds
    Eurozone Neutral Eurozone trading at a record discount vs the US; Growth differential to improve
    UK Overweight Valuations 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

Source: Datastream, MSCI, IBES, J.P. Morgan, Prices and Valuations as of COB 14th Mar, 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, or you can contact the cover

Equity Flows Snapshot

Table 15: DM Equity Fund Flows Summary

Regional equity fund flows
$mn % AUM
1w 1m 3m ytd 12m 1w 1m 3m ytd 12m
Europe ex UK 372 157 84 -973 -12,929 0.1% 0.1% 0.0% 0.3% 0.6%
UK -851 -2,442 -6,008 -4,147 -28,222 0.1% 0.0% 0.0% -0.3% -4.2%
US -132 34,380 57,089 24,129 162,881 -0.3% -0.9% -2.3% -1.5% -10.1%
Japan 1,170 4,092 7,661 8,328 18,868 0.0% 0.3% 0.6% 0.2% 2.0%

Source: EPFR, as of 6th Mar, 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 6th Mar, 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 16: Sector Index Performances — MSCI Europe

Source: MSCI, Datastream, as at COB 14th Mar, 2024.

Table 17: Country and Region Index Performances

(%change) Local Currency US$
Country Index 4week 12m YTD 4week 12m YTD
Austria ATX 0.7 1.0 (1.2) 1.8 2.6 (2.6)
Belgium BEL 20 (0.1) (1.0) (0.4) 1.1 0.5 (1.9)
Denmark KFX 6.1 44.1 20.5 7.3 46.0 18.7
Finland HEX 20 0.2 (10.2) (3.2) 1.3 (8.8) (4.6)
France CAC 40 5.4 14.3 8.2 6.6 16.0 6.6
Germany DAX 5.3 17.8 7.1 6.5 19.6 5.6
Greece ASE General 1.0 32.0 9.6 2.2 34.0 8.1
Ireland ISEQ 3.9 16.7 10.4 5.1 18.5 8.8
Italy FTSE MIB 6.6 26.1 11.3 7.8 28.0 9.7
Japan Topix 2.7 36.7 12.5 4.0 23.9 7.0
Netherlands AEX 1.3 16.4 9.1 2.5 18.2 7.6
Norway OBX 3.4 2.5 (0.7) 3.2 2.4 (4.5)
Portugal BVL GEN (3.7) (10.3) (12.7) (2.5) (8.9) (13.9)
Spain IBEX 35 5.7 14.5 3.8 6.9 16.3 2.4
Sweden OMX 6.0 15.6 5.5 7.2 17.2 2.9
Switzerland SMI 3.9 9.4 5.2 3.5 13.1 0.3
United States S&P 500 2.4 31.4 8.0 2.4 31.4 8.0
United States NASDAQ 1.4 41.1 7.4 1.4 41.1 7.4
United Kingdom FTSE 100 1.9 1.4 0.1 3.2 6.4 0.1
EMU MSCI EMU 4.4 14.4 7.7 5.6 16.1 6.2
Europe MSCI Europe 3.9 11.5 6.1 4.9 14.4 4.3
Global MSCI AC World 2.6 26.7 7.5 2.8 26.5 6.7

Source: MSCI, Datastream, as at COB 14th Mar, 2024.

Earnings

Table 18: IBES Consensus EPS Sector Forecasts — MSCI Europe

EPS Growth (%yoy)
2023 2024E 2025E 2026E
Europe (3.3) 3.4 10.0 9.2
Energy (31.6) (4.4) 4.3 8.9
Materials (39.8) 8.5 11.1 6.8
Chemicals (38.7) 25.1 18.5 11.8
Construction Materials 12.2 10.2 8.9 9.1
Metals & Mining (46.2) (5.1) 3.6 0.7
Industrials 1.3 7.4 13.5 11.8
Capital Goods 22.4 10.9 13.5 11.8
Transport (54.7) (19.5) 16.6 12.8
Business Svs 3.2 9.4 11.0 11.4
Discretionary 7.8 2.3 10.7 9.5
Automobile 2.6 (3.5) 5.8 6.3
Consumer Durables (5.4) 5.8 14.2 13.4
Media (0.5) 9.6 9.7 11.5
Retailing 50.7 14.5 17.1 6.5
Hotels,Restaurants&Leisure 91.5 17.3 21.4 17.3
Staples 2.5 3.0 8.7 7.7
Food & Drug Retailing 5.3 4.1 11.5 7.8
Food Beverage & Tobacco 2.0 2.0 8.5 7.9
Household Products 3.0 5.5 8.0 7.3
Healthcare 3.1 4.3 13.9 10.9
Financials 15.6 5.4 7.9 8.6
Banks 28.5 0.6 4.6 5.9
Diversified Financials (22.6) 19.7 22.8 24.3
Insurance 13.9 10.5 7.8 5.8
Real Estate 11.0 (2.1) 4.2 6.5
IT 13.9 (4.6) 28.6 15.9
Software and Services 18.5 (0.1) 20.4 14.0
Technology Hardware (20.8) 11.5 8.5 8.9
Semicon & Semicon Equip 28.0 (12.2) 41.8 19.0
Telecoms (8.7) 10.6 10.0 8.1
Utilities 0.3 (0.2) 1.0 1.8

Source: IBES, MSCI, Datastream. As at COB 14th Mar, 2024.

Table 19: IBES Consensus EPS Country Forecasts

EPS growth (%change)
Country Index 2023 2024E 2025E 2026E
Austria ATX (15.3) (5.9) 5.1 1.8
Belgium BEL 20 20.7 (2.2) 11.6 12.9
Denmark Denmark KFX (14.4) 26.6 20.9 16.8
Finland MSCI Finland (25.1) 4.7 11.3 9.2
France CAC 40 (2.2) 2.8 9.0 8.3
Germany DAX 1.6 0.4 11.8 10.6
Greece MSCI Greece 8.5 0.5 4.4 22.2
Ireland MSCI Ireland 32.5 (2.2) 2.5 7.2
Italy MSCI Italy 9.9 0.8 3.0 2.5
Netherlands AEX (0.9) (0.5) 13.2 11.7
Norway MSCI Norway (40.1) 3.8 6.5 3.1
Portugal MSCI Portugal 21.6 11.4 6.4 7.9
Spain IBEX 35 8.3 1.1 4.4 5.4
Sweden OMX 31.6 0.4 8.3 7.1
Switzerland SMI (4.2) 9.4 13.8 10.0
United Kingdom FTSE 100 (11.2) 1.4 7.9 9.2
EMU MSCI EMU 4.1 2.8 10.1 8.7
Europe ex UK MSCI Europe ex UK 0.9 4.1 11.0 9.1
Europe MSCI Europe (3.3) 3.4 10.0 9.2
United States S&P 500 2.2 9.8 13.5 11.7
Japan Topix 2.9 15.2 8.9 9.3
Emerging Market MSCI EM (5.0) 17.3 15.7 12.7
Global MSCI AC World 0.2 8.9 12.7 11.0

Source: IBES, MSCI, Datastream. As at COB 14th Mar, 2024** 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/E Dividend Yield EV/EBITDA Price to Book
2024e 2025e 2026e 2024e 2025e 2026e 2024e 2025e 2026e 2024e 2025e 2026e
Europe 14.1 12.8 11.8 3.4% 3.6% 3.8% 8.1 7.5 7.0 1.9 1.8 1.7
Energy 7.6 7.2 6.7 5.6% 5.5% 5.7% 3.3 3.3 3.2 1.2 1.1 1.0
Materials 15.6 14.0 13.2 3.3% 3.5% 3.7% 7.4 6.7 6.4 1.7 1.6 1.5
Chemicals 23.9 20.2 18.0 2.7% 2.9% 3.1% 11.3 10.1 9.4 2.4 2.3 2.2
Construction Materials 13.9 12.7 11.7 2.8% 2.9% 3.1% 7.4 7.0 6.5 1.7 1.6 1.5
Metals & Mining 9.7 9.4 9.3 4.4% 4.6% 5.0% 4.7 4.2 4.2 1.1 1.1 1.0
Industrials 19.6 17.3 15.4 2.4% 2.6% 2.8% 10.1 9.0 8.3 3.3 3.1 2.9
Capital Goods 19.6 17.3 15.5 2.2% 2.5% 2.7% 10.4 9.3 8.5 3.5 3.2 3.0
Transport 16.3 14.0 12.4 3.6% 3.7% 3.7% 6.9 6.5 6.1 1.6 1.5 1.5
Business Svs 21.9 19.8 17.7 2.4% 2.6% 2.7% 13.1 11.9 11.1 6.1 5.6 5.0
Discretionary 14.0 12.6 11.8 2.6% 2.9% 3.0% 5.5 5.1 4.7 2.0 1.8 1.8
Automobile 6.4 6.0 5.9 4.9% 5.3% 5.3% 1.8 1.7 1.7 0.8 0.7 0.7
Consumer Durables 25.7 22.5 19.8 1.7% 1.9% 2.1% 14.4 13.1 11.7 4.6 4.1 3.7
Media & Entertainment 16.7 15.2 13.3 2.3% 2.5% 2.9% 11.1 9.6 8.9 1.9 1.6 2.1
Retailing 14.9 12.8 12.0 2.5% 2.7% 3.0% 10.1 9.2 8.0 2.9 2.7 2.2
Hotels,Restaurants&Leisure 23.8 19.6 16.7 2.1% 2.4% 2.8% 12.4 10.6 9.7 4.2 3.8 3.5
Staples 17.1 15.7 14.6 3.1% 3.3% 3.6% 10.8 10.1 9.3 2.9 2.7 2.6
Food & Drug Retailing 11.9 10.7 9.9 4.1% 4.5% 4.8% 6.0 5.6 5.4 1.5 1.5 1.4
Food Beverage & Tobacco 16.7 15.3 14.2 3.5% 3.7% 4.0% 10.6 9.9 9.1 2.6 2.5 2.3
Household Products 20.2 18.7 17.4 2.4% 2.5% 2.7% 14.0 13.0 12.6 4.3 4.1 4.1
Healthcare 18.1 15.9 14.3 2.3% 2.5% 2.8% 12.6 11.1 10.2 3.5 3.2 3.0
Financials 9.0 8.4 7.7 5.6% 5.7% 6.2% - - - 1.1 1.0 0.9
Banks 6.8 6.5 6.2 7.5% 7.5% 8.0% - - - 0.8 0.7 0.7
Diversified Financials 15.1 12.3 10.0 2.4% 2.6% 2.9% - - - 1.4 1.5 1.4
Insurance 10.9 10.1 9.5 5.4% 5.8% 6.2% - - - 1.7 1.6 1.5
Real Estate 13.9 13.3 12.5 4.2% 4.5% 4.8% - - - 0.8 0.8 0.8
IT 30.3 23.6 20.4 1.1% 1.3% 1.4% 18.9 15.0 12.9 5.1 4.6 4.1
Software and Services 31.1 25.8 22.7 1.2% 1.4% 1.5% 20.0 16.3 14.3 4.6 4.3 3.8
Technology Hardware 15.8 14.6 13.4 2.6% 2.6% 2.9% 9.2 8.3 7.1 1.9 1.8 1.7
Semicon & Semicon Equip 35.4 25.0 21.0 0.8% 1.0% 1.1% 22.5 16.5 14.0 8.4 7.1 6.0
Communication Services 13.9 12.6 11.6 4.3% 4.5% 4.8% 6.5 6.1 5.7 1.4 1.3 1.3
Utilities 11.9 11.8 11.6 5.4% 5.6% 5.6% 7.8 8.0 8.2 1.5 1.4 1.4

Source: IBES, MSCI, Datastream. As at COB 14th Mar, 2024.

Table 21: 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 7.4 7.5 7.1 6.8 6.2%
Belgium BEL 20 15.2 15.6 14.0 12.1 3.1%
Denmark Denmark KFX 28.7 30.3 25.0 21.4 1.6%
Finland MSCI Finland 14.2 14.6 13.1 12.0 4.6%
France CAC 40 13.4 13.7 12.6 11.6 3.2%
Germany DAX 12.2 12.6 11.3 10.4 3.4%
Greece MSCI Greece 29.4 29.8 28.5 20.3 1.7%
Ireland MSCI Ireland 10.9 11.0 10.7 10.0 3.6%
Italy MSCI Italy 9.0 9.1 8.8 8.6 5.5%
Netherlands AEX 15.0 15.4 13.6 12.4 2.5%
Norway MSCI Norway 10.4 10.6 9.9 9.6 6.7%
Portugal MSCI Portugal 13.5 13.7 12.9 11.9 4.2%
Spain IBEX 35 10.7 10.9 10.4 9.9 4.9%
Sweden OMX 15.6 15.9 14.7 13.8 3.7%
Switzerland SMI 17.3 17.9 15.7 14.3 3.3%
United Kingdom FTSE 100 11.0 11.2 10.4 9.5 4.2%
EMU MSCI EMU 13.3 13.6 12.4 11.4 3.4%
Europe ex UK MSCI Europe ex UK 14.8 15.2 13.7 12.6 3.2%
Europe MSCI Europe 13.8 14.1 12.8 11.8 3.4%
United States S&P 500 20.7 21.6 19.0 17.0 1.5%
Japan Topix 14.8 16.1 14.8 13.6 2.2%
Emerging Market MSCI EM 11.9 12.3 10.9 9.6 3.0%
Global MSCI AC World 17.4 18.0 16.2 14.6 2.1%

Source: IBES, MSCI, Datastream. As at COB 14th Mar, 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 22: Economic Outlook in Summary

Real GDP Real GDP Consumer prices
% oya % over previous period, saar % oya
2023E 2024E 2025E 3Q23 4Q23 1Q24E 2Q24E 3Q24E 4Q24E 3Q23 1Q24E 3Q24E 1Q25E
United States 2.5 2.3 1.6 4.9 3.2 2.3 1.5 0.7 0.7 3.6 3.1 2.9 2.5
Eurozone 0.5 0.4 1.0 -0.2 -0.2 0.5 0.7 0.7 0.7 5.0 2.6 2.2 1.9
United Kingdom 0.1 0.0 0.1 -0.5 -1.4 1.0 0.8 0.0 -0.5 6.7 3.6 1.7 2.3
Japan 1.9 0.5 0.8 -3.3 -0.4 1.0 1.7 1.0 0.8 3.1 2.8 3.6 2.8
Emerging markets 4.2 3.9 3.6 5.8 3.9 4.2 3.6 3.7 3.6 3.8 3.8 3.5 3.5
Global 2.7 2.4 2.3 3.6 2.5 2.6 2.2 2.0 2.0 4.0 3.3 3.0 2.8

Source: J.P. Morgan economic research J.P. Morgan estimates, as of COB 15th Mar, 2024

Table 23: Official Rates Outlook

Forecast for
Official interest rate Current Last change (bp) Forecast next change (bp) Mar 24 Jun 24 Sep 24 Dec 24
United States Federal funds rate 5.50 26 Jul 23 (+25bp) Jun 24 (-25bp) 5.50 5.25 5.00 4.75
Eurozone Depo rate 4.00 14 Sep 23 (+25bp) Jun 24 (-25bp) 4.00 3.75 3.50 3.00
United Kingdom Bank Rate 5.25 03 Aug 23 (+25bp) Aug 24 (-25bp) 5.25 5.25 5.00 4.50
Japan Pol rate IOER -0.10 Jan 16 (-20bp) 3Q24 (+10bp) -0.10 -0.10 0.00 0.25

Source: J.P. Morgan estimates, Datastream, as of COB 15th Mar, 2024

Table 24: 10-Year Government Bond Yield Forecasts

10 Yr Govt BY Forecast for end of
18-Mar-24 Jun 24 Sep 24 Dec 24 Mar 25
US 4.31 4.15 4.05 4.00 3.90
Euro Area 2.44 2.20 2.05 1.90 1.80
United Kingdom 4.10 4.05 3.95 3.80 3.65
Japan 0.79 0.75 0.85 1.05 1.05

Source: J.P. Morgan estimates, Datastream, forecasts as of COB 15th Mar, 2024

Table 25: Exchange Rate Forecasts vs. US Dollar

Exchange rates vs US$ Forecast for end of
15-Mar-24 Jun 24 Sep 24 Dec 24 Mar 25
EUR 1.09 1.05 1.05 1.09 1.12
GBP 1.27 1.22 1.22 1.25 1.29
CHF 0.88 0.92 0.91 0.89 0.87
JPY 149 148 146 144 142
DXY 103.4 106.3 106.0 102.8 100.2

Source: J.P. Morgan estimates, Datastream, forecasts as of COB 15th Mar, 2024

Sector, Regional and Asset Class Allocations

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

MSCI Europe Weights Allocation Deviation Recommendation
Energy 6.1% 8.0% 1.9% OW
Materials 7.1% 6.0% -1.1% N
Chemicals UW
Construction Materials N
Metals & Mining N
Industrials 15.3% 14.0% -1.3% N
Capital Goods ex Aerospace & Defence UW
Aerospace & Defence OW
Transport N
Business Services N
Consumer Discretionary 9.4% 7.0% -2.4% UW
Automobile UW
Consumer Durables N
Consumer Srvcs UW
Speciality Retail UW
Internet Retail UW
Consumer Staples 11.9% 13.0% 1.1% OW
Food & Drug Retailing UW
Beverages OW
Food & Tobacco OW
Household Products OW
Healthcare 15.5% 18.0% 2.5% OW
Financials 17.9% 14.0% -3.9% UW
Banks UW
Insurance N
Real Estate 0.8% 2.0% 1.2% OW
Information Technology 7.2% 7.0% -0.2% 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 4.3% 6.0% 1.7% 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 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 28: 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 29: 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.

Companies Discussed in This Report (all prices in this report as of market close on 15 March 2024, unless otherwise indicated)BNP Paribas(BNPP.PA/€61.21/N), Bank Of Ireland Group PLC(BIRG.I/€8.91/UW), Credit Agricole(CAGR.PA/€13.02/UW), Handelsbanken(SHBa.ST/Skr120.30/UW), Lloyds Banking Group(LLOY.L/50p/UW), Nordea Bank Abp(NDASE.ST/Skr125.38/UW)

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Completed 17 Mar 2024 10:21 PM GMTDisseminated 18 Mar 2024 03:00 AM GMT