(Reuters) - J.P.Morgan expects economic uncertainty clouding the outlook for risky assets in the first half of next year as investors look for clarity on the direction of monetary policy.
"Equities will likely need to negotiate earnings adjustment, as activity slows. We believe that the risk-reward for equities will start fundamentally improving once the (U.S. Federal Reserve) is advanced with interest rate cuts," strategists at J.P.Morgan, led by Mislav Matejka, said in a note.
Fed funds futures are now pricing in more than hundred basis points (bps) of cuts in 2024 and a 40% chance they begin as soon as March. [FEDWATCH]
Earnings growth in Europe will be flat in 2024 provided no recession materializes, J.P.Morgan said, warning that expectations of a re-acceleration in corporate topline and margins will be challenged on weakening pricing and volumes.
They hold an "underweight" position in European equities, but note that they are not expensive, especially compared to stretched valuations in U.S. stocks.
The pan-European STOXX 600 index is up 7.6% so far this year, compared with an 18.5% jump in the S&P 500 index.
Easing monetary policy could see a reversal of their underweight opinion on European equities in the second half of 2024, Matejka said.
At sector level, J.P.Morgan downgraded European food retail, hotels and travel and semiconductors to "underweight".
Food retail is likely to see increased price competition which could lead to margins contraction in 2024, while concerns over pricing, volumes and inventory could hit chip stocks, J.P.Morgan said.
The bank continues to hold an "overweight" position in Japan stocks. They see a "more realistic chance" for emerging market stocks to potentially outperform, especially if China's economic growth surprises on the upside.