After a disappointing August for the stock markets and a start to September that has not been all that exciting, many investors are wondering how to face the coming months. In this context, JP Morgan maintains a «more selective» approachwith preference for the quality and the companies defensive. «We examine sector and style preferences regarding the shape of the yield curve. The current phase is likely to be described as an upward slope, with long-term yields falling but also an even faster downward movement of short-term yields,» explain the experts of the American banking giant. Similarly, these analysts highlight that «stocks with higher beta tended to be the most rewarded during the downward slope of the curve, while defensive stocks tended to do well during the upward flattening of the curve.» In this sense, JP Morgan points out that the upward slope could lead to «a good result» for cyclical stocksespecially when The Federal Reserve (Fed) begins to cut interest rates; in this regard, everything seems to indicate that the first drop will come on September 18 and will be 25 basis points. However, these experts emphasize that the 'crux of the matter is in «the context of activity, since, in particular, the yield curve always sloped before past recessions.» «The last eight times that the Federal Reserve initiated easing, half were followed by a soft landing and the other half by a recession. Our main forecast remains that bond yields will continue to fall, and the CESI indices (if the economy is performing better or worse than expected) remain negative in the US, Europe and China,» these strategists emphasize. Consequently, they add, the defensive sectors are among the most profitable in the US and Europe over the past six months. «They could continue to do so, given lower bond yields and weaker activity momentum. Many cyclical sectors have performed poorly, especially commodities and consumer products.but going long in these sectors typically requires a steeper curve, and that with an increase in 10-year profitability. We remain skeptical about the market in general«, they warn. JP Morgan maintains overweight «Key» defensive sectors such as healthcare, utilities, real estate, telecommunications and basic goods and remains awaiting better results. By subsectors, the US firm remains cautious in the hotel sector in the short term, as demand trends «continue to normalize» and the lack of positive earnings revisions «is not favorable»; thus, they are 'underweight' IHGreaffirm their 'neutral' advice on Accor and 'overweight' Whitbread. Regarding the values of restoration, the preference remains «quality and impetus in obtaining contracts»; hence, they maintain the 'overweighting' of Compass and Aramark facing Sodexo and Elioralthough both get a 'neutral' advice. «We are more constructive on the gaming sector, with a strong preference for market-leading operators with superior products and technology that are well positioned to mitigate regulatory headwinds, especially against the backdrop of relatively easy sports comps across the board in the second half. Our strongest convictions are Flutter and DraftKings, both 'overweight', as well as Lottomatica and OPAP. We like UK pubs, which benefit from further margin expansion potential as inflation continues to ease: we prefer Marston's ('overweight') over Mitchells & Butlers and Young's ('neutral'),» these analysts add.
'SMALL CAPS' and 'VALUE'
JP Morgan also notes in its report that interest rate cuts should bring about «a change of fortune» for small caps or 'small caps', while showing their «discomfort» with «the strength of economic activity.» «Small caps have been performing poorly for a long time, They are cheap and the risk of concentration remains in megacapsIt is encouraging that since June, small-cap companies in several regions have begun to get better results«, these strategists detail. On the other hand, the American firm highlights that Value investing has historically performed well when yields and activity have moved higher. In this case, JP Morgan highlights that the factors are «contradictory»: on the one hand, growth is traded at a premium and the risk of concentration is high, but it is also likely that yields will fall and activity will be mixed, which would incline to continue paying the premium for growth. «Taking into account the strong run of 'growth', in the summer we have changed our previous opinion of 'overweighting' growth to 'value' to 'neutral', but we have not reversed it. To buy 'value' directly, it would be necessary for the earnings per share of growth stocks to start to fall compared to value stocks and for bond yields to rise for the right reasons, which is not the case at the moment» they conclude.