JPMorgan’s equity strategist team has published a report today trying to figure out if European stocks will finally break out the glassdoor of 400 points (for Stoxx Europe 600) that they have been hitting 3 times already (2000, 2007, 2015).
They argue that this time might be the time, IF a number of conditions are successfully met. Among them, earnings recovery, operating leverage, decent (!) valuations and direction of bond yields are important factors to consider. Big swing factor are FX.
(Most of the data points/comments are extracted from a Primer published in Oct 2016 by Bank of America Merrill Lynch. Comments and financial data at the end are my own).
After a number of underperforming years, European oil & gas companies have been staging their comeback: they have cut into capex and opex to generate more cash flow or reduce debt and be able to maintain their payout/dividend payment.
« 2016 saw the 3rd best annual performance for US High Yield on record. Commodities posted their best year of returns since 2009, a feat all the more impressive given early losses. It was a surprisingly ho-hum year for performance in global equities (+8.5% in MSCI ACWI), global rates, and the USD (+4.3%), with those numbers masking big divergences by region, style, and the 1st-versus-2nd half of the year. We also note that global correlations have plunged, driven largely by the breakdown in rates correlation to risk assets and regional correlations within equities. »
« As equities rallied and bonds sold off, our measure of risk appetite reached a new post-crisis high, but it has started to retreat more recently. Near-term, we think growth optimism will persist and keep risk appetite strong. We are long US equity near-term as it should be a direct beneficiary of growth optimism, but expect optimism to moderate eventually. Later in 2017 we are looking to rotate from S&P 500 to EM (specifically EM-ex-China) where risk appetite has lagged and we expect the growth picture to be more supportive. We also like Europe and Japan on a 12-month horizon in our asset allocation. Both of these lagged global equities in 2016, but should continue to be beneficiaries of reflation and have supportive monetary policy backdrops. »
On a 12 month horizon, GS is overweight Equities, with a bias towards Europe and Japan, but underweight US equities and Neutral on Asia ex-Japan.
The bank underweights Government bonds and is Neutral on credit (yet with a preference for US High Yield and Euro High Yield).