CHUNYIP WONG
Japan is a top pick for equities, according to a JPMorgan Equity Strategy Report, published on Monday.
JPM upgraded Japan equities (NYSEARCA:EWJ), (DXJ) to overweight in their December 2022 global regional allocation report. The team continues to be bullish on the region.
“Japan is a beneficiary of an exit from deflation, and of the improving governance/multiples on the back of TSE initiative (which restructured its cash equity markets into three segments, including prime, standard and growth markets),” the report said.
Japan equities (EWJ), (DXJ) are attractively priced, analysts said. Buybacks are accelerating, companies’ inflows could increase further, and the domestic reallocation into equities is also increasing. JPM analysts said they recommend investors not to hedge the FX anymore.
Analysts are also underweight international stocks, in particular the Eurozone, compared to the U.S., which they call a “wild card” that could start to strengthen again.
“We think that potentially an opportunity could come up later in 2024 to add to EM, Eurozone and to small caps more sustainably, after a period of big underperformance, but we would wait to get past the initial Fed cuts,” analysts said.
The U.K. (EWU), (FLGB), however, could gain more support from being at record discount, compared to other regions, as well as the highest dividend yield globally, analysts added.
“U.K. has done poorly in ‘23 as global indices were up, but crucially the U.K. is a low beta market, and could hold up better during potential periods of volatility,” they said.
Analysts held overweight the FTSE 100 Index (UKX) vs the FTSE 250 Index pair trade over the past 24 months, and still hold their position.
The rest of the Eurozone looks cheap, JPM analysts said. It is a “global cycle value play and could struggle to outperform in the event of more aggressive earnings downgrades, and with growth leading.” Analysts expected continued weaker relative activity performance there.
Finally, when it comes to the U.S., it typically holds up better than other regions during risk-off periods if markets weaken.
“The concern is that the U.S. is trading at relative P/E and EPS highs, and that could constrain its absolute performance from here,” analysts said. “We advised in October ‘22 to turn more positive on tech (XLK) and have been overweight growth vs. value in ‘23, which helps the U.S., but the tech run has already been exceptional, and there could be increased volatility in that space ahead.”
