J.P. Morgan slashes eurozone stocks as dollar falls

After a more than one-year overweight rating on eurozone equities, strategists at J.P. Morgan are struggling to reach new reasons to stay upbeat on the region, cutting their stance to neutral.

In a report out on Monday, the analysts said stocks from the currency bloc aren’t as expensive as earlier in the year, but that they still aren’t outright cheap.

“ECB action is behind us, euro strengthening is a problem, relative valuations are unexciting and the region is a consensus [overweight],” they said in a the note. They bank has been overweight eurozone stocks since November 2014.

The euro has jumped 3.8% against the dollar and 6.3% against the pound since the beginning of the year, leaving pressure on the major European exporters. Both the U.K. and U.S. are major eurozone trade partners, so a stronger euro is likely to take a toll on a major part of the region’s exports.

Not even a surprisingly aggressive easing package from the European Central Bank announced earlier in March could make a dent in the euro’s appreciation, with the shared currency currently trading around the highest level in five months. A more dovish than expected Federal Reserve statement last week has also worked against European equities, as it served to send the dollar sharply lower.

“A potentially weaker dollar would be a problem for eurozone equities. [The EuroStoxx 50] was typically strongly negatively correlated to the move in EUR/USD, which our FX strategists expect to appreciate to 1.15 into year-end,” the J.P. Morgan analysts said.

“European earnings relative to the U.S. are unsurprisingly inversely correlated to the EUR/USD rate,” they said.

However, a weaker greenback isn’t bad for all regions. Emerging-markets stocks and currencies have recently rallied sharply, partly supported by a stabilization in oil prices and a drop in the dollar. A lot of emerging-market economies have borrowed money in dollars, so a weaker U.S. currency makes it less expensive for the borrowers to pay off their debt.

“We started the year neutral [emerging markets] vs. [developed markets], arguing that EM would not be a source of underperformance anymore. The prospect of sustained dollar weakening is an incremental positive in our view, which prompts us to move EM to outright OW,” J.P. Morgan said in the Monday note.

The analysts said all emerging-market countries currently benefit from a dollar drop, particularly China, Brazil and Russia.

Source: MarketWatch