Reflation Trade Still in Vogue After Stock Gains, JPMorgan SaysBy
Investors who pushed equities higher in recent months on bets of faster global growth and inflation should stay the course, according to JPMorgan Chase & Co.
Despite stocks reaching new peaks, extending the rally that began after the U.S. election, the trade remains supported by robust macroeconomic indicators, strategists including Mislav Matejka and Emmanuel Cau wrote in a note. It’s a sentiment echoed by their peers at Natixis SA, who said that equities remain the asset class to be in as the reflation theme continues and the Federal Reserve tightens monetary policy.
“Equities are continuing to defy numerous correction calls,” JPMorgan strategists wrote on Monday. “Activity momentum might be peaking, but we find that this is not enough to take risk off the table. One should remain constructive and look through any weakness.”
An uptick in earnings momentum and a pickup in inflation that would boost top-line growth and corporate pricing power are among factors JPMorgan sees helping equities, saying the asset class remains underowned. Consumer prices are expected to rise faster in both Europe and the U.S. this year.
JPMorgan strategists are overweight euro-area stocks, and within the region, prefer Germany. The DAX Index looks “relatively cheap” and will benefit from any euro weakness, they wrote. The benchmark trades at 13.6 times the estimated earnings of its members, a lower valuation than the Stoxx Europe 600 Index, even after surging 17 percent since a November low.
The bank is also bullish on Japan, while cautioning that a stronger yen would pose a risk, and underweight U.K. equities. With the prospects of a Fed rate hike in March almost entirely priced in, “the time might be approaching” to re-enter emerging markets, according to JPMorgan.
Natixis also sees value in developing market equities, as well as in the U.S. Protectionist policies from U.S. President Donald Trump and a rising dollar pose risks for emerging markets but are unlikely to materialize in the short term, prompting a “tactical bull call,” its strategists including Emilie Tetard wrote in a note on Monday.