Investing.com -- JPMorgan analysts remain cautious on Eurozone equities, maintaining in a note Monday their stance that the Euro Stoxx 50 (SX5E) will continue to struggle.
“Eurozone equities have failed to make headway since March, and we keep the view that SX5E will stay stuck in absolute terms for a while longer,” the investment bank wrote.
The firm cites weakening economic activity and underwhelming earnings delivery as key factors keeping the region’s markets sluggish.
While there has been growing investor interest in gaining European exposure, JPMorgan notes there is a shift away from traditional powerhouses.
“We are fielding more and more investor enquiries with respect to how to have exposure to Europe, but avoiding core – France and Germany, the two countries are these days seen as weak links by many,” JPMorgan noted, marking a reversal from the past decade when investors favored the core over the periphery.
The analysts see some appeal in peripheral markets, particularly Spain, where GDP growth forecasts are more attractive than in Germany and France.
“In terms of fiscal room, Italy and Spain have scope to support their growth,” JPMorgan added.
However, the outlook for these regions is closely tied to banking performance. While banks have delivered strong returns over the past three years, their profitability may have peaked with the European Central Bank (ECB) expected to cut rates.
JPMorgan cautions, “If banks stall, periphery would look less attractive.” Further uncertainty is said to come from the upcoming U.S. elections, bond yields, and trade risks.
“If bond yields move higher, and the market takes this positively, then periphery stands a chance to keep outperforming core," said JPMorgan, adding, however, that they worry that "any meaningful move up in bond yields from here could have negative implications for risk assets."
Overall, the bank's top pick in Europe remains the UK.