JP Morgan has warned that risk appetite may stall into the summer as stagflationary pressures build and the impact of tariffs begins to bite.
Against this backdrop, the bank has adopted a neutral stance on European equities while tactically upgrading emerging markets (EM) to overweight, citing a range of supportive drivers.
European equities have enjoyed a remarkable 20% rally against the US in the first quarter, only to plateau since March.
“With respect to Europe, we argued towards the end of Q1 that, given the strong run at the start of the year, valuations, positioning and sentiment were all getting stretched, making Europe tactically overbought,” JP Morgan said, adding that a period of consolidation is both inevitable and healthy.
This pull-back in Europe has been accompanied by a normalisation of fund flows.
After a surge of investor interest in Eurozone exchange-traded funds in Q1, flows have subsided, while US ETF inflows have started to pick up again, potentially signalling a contrarian entry point for nervous buyers.
Why EM is catching JPM's eye
The American bank highlighted several catalysts underpinning its EM upgrade.
Improved China–US trade negotiations have lifted confidence, while a rally in EM fixed income and stronger emerging-market currencies have already begun to support equity performance.
The bank also pointed to the prospect of Fed easing later this cycle and possible fresh Chinese stimulus during the summer. “EM valuations at 12x forward P/E are attractive and positioning remains light,” the note stated, underscoring the region’s compelling entry valuation.
Encouraging fundamentals in Europe
Despite its cautious near-term view on Eurozone equities, JPM acknowledged signs that could rekindle European performance later in the year.
Median European earnings growth has matched that of the US over the past three quarters, a marked improvement compared with the prior period and a welcome sign of corporate resilience.
Rate cuts by the European Central Bank are also beginning to filter through via a rising credit impulse, while Germany’s ZEW economic-expectations index has rebounded sharply and the Eurozone Composite Economic Surprise Index is now solidly positive.
A note of caution...and a UK silver lining
JP Morgan reminded investors that trade negotiations remain at an early stage and mixed headlines could unsettle markets.
Within Europe, the UK may hold up better than the Eurozone, given its lower beta profile, commodity-sector exposure and progress towards a UK–US trade deal.