JPMorgan Favors UK Stocks Over Underperforming Eurozone Rivals

JPMorgan has expressed a cautious outlook regarding eurozone equities, opting instead to focus on the UK market within Europe.

Despite Wall Street’s major indices reaching all-time highs following a significant interest rate cut by the Federal Reserve, the Euro Stoxx 50 index has struggled to gain traction since March, according to JPMorgan.

In a recent note dated September 23, analysts at JPMorgan highlighted that eurozone valuations, currently at a forward price-to-earnings ratio of 12.8, are appealing. However, they maintain a cautious stance, predicting that the eurozone will continue to lag behind the US.

The bank referred to the eurozone as a “Cyclical Value play” that is heavily influenced by developments in China. Cyclical sectors, including Autos, Luxury, Mining, and Semiconductors, have seen a decline of approximately 20% in recent months. JPMorgan noted that they remain bearish on these sectors, anticipating further downturns driven by negative earnings revisions and unattractive valuations.

On a positive note, JPMorgan pointed out that the gap between cyclicals and leading economic indicators has narrowed. Historically, cyclical sectors tend to start rallying 4-6 months after the Federal Reserve begins cutting rates in a soft landing scenario, suggesting that early next year could present a buying opportunity for cyclicals.

The bank is also cautious about the Chinese economy, which typically poses challenges for eurozone equities. Nonetheless, the Chinese market has already adjusted lower, and there is renewed optimism regarding stimulus measures, which could provide support in the future.

JPMorgan emphasized that euro equities are facing challenges due to disappointing earnings and ongoing downgrades. Additionally, economic activity momentum appears to have stalled, as evidenced by a recent drop in the ZEW survey to a new yearly low, with purchasing managers’ indices remaining considerably below levels historically associated with positive earnings revisions. Potential risks stemming from trade and tariffs further complicate the situation.

In contrast, the UK market remains a focal point for JPMorgan, which has a favorable view of it. The UK has emerged as the best-performing market globally over the past six months, with returns of +11% in USD terms, outperforming the US, while the Euro Stoxx 50 has declined by 2% during the same period.

The bank notes that UK valuations are attractive, with a price-to-earnings ratio of 11.5 and a fully covered dividend yield of 4.0%, surpassing other major markets. Moreover, the political landscape in the UK appears more supportive, showing less policy inertia, which has benefited the market. The defensive sector leadership observed in recent months also plays a role in strengthening the UK market, known for its lower beta characteristics.