Equity Strategy: Closing the OW US vs Eurozone trade

Speaker: Mislav Matejka, CFA, Head of Global Equity Strategy 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. 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. 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. 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. 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. 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 China call, 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, with Goldilocks fully in the price. The risks are on both sides of this narrow path: either to growth disappointing, as seen in latest weak 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. 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.   This podcast was recorded on 17 March 2024. This communication is provided for information purposes only. Institutional clients can view the related report at https://www.jpmm.com/research/content/GPS-4651487-0 for more information; please visit www.jpmm.com/research/disclosures for important disclosures. © 2024 JPMorgan Chase & Co. All rights reserved. This material or any portion hereof may not be reprinted, sold or redistributed without the written consent of J.P. Morgan. It is strictly prohibited to use or share without prior written consent from J.P. Morgan any research material received from J.P. Morgan or an authorized third-party (“J.P. Morgan Data”) in any third-party artificial intelligence (“AI”) systems or models when such J.P. Morgan Data is accessible by a third-party. It is permissible to use J.P. Morgan Data for internal business purposes only in an AI system or model that protects the confidentiality of J.P. Morgan Data so as to prevent any and all access to or use of such J.P. Morgan Data by any third-party.