>EQUITY STRATEGY (JP MORGAN)

Key Calls

■Still positive on equities, the main drivers remain supportive, but looking to reduce some risk in Cyclicals when/if ISM prints above 50:

■Credit stabilisation – most credit indicators back to pre-Lehman levels. New issuance well accepted.

■Fiscal and monetary policy actions tracking into real economy. “Money illusion” at work.

■ Steep yield curve – the most recent short end sell-off is premature in our view.

■ Macro momentum troughing – economic data flow is showing signs of stabilisation, admittedly from an extremely low level.

■ Earnings trough near – analysts to move to a phase of outright upgrades. The trend ex-financial margins might not need to structurally move lower.

■ Inflation backdrop positive – we believe investors could be surprised by how low inflation remains for longer. Asset reflation; not inflation. The return of “Goldilocks”.

■ Attractive Valuations – trend P/E for Europe at 12.5x, P/S at 0.9, DY significantly beating risk free.

■ Inflows to come - consensus is still underweight equities.

■ We acknowledge the negatives of overbought technicals, backup in mortgage rates, rising oil price.

■ Key risk: Credibility driven bond sell-off, but we believe yields should be rising due to supply-demandimbalance, flows, change in growth/inflation outlook. Above 4.5% on 10Y US impact could be -ve.

■ Key trades:
- Continue OW on Equities and Cyclicals. Triggers to reduce risk potentially coming in Q4, some Defensives are starting to look interesting and we would look to close OW Cyc /UW Defensives then.

- Earnings revisions and quality to re-emerge as drivers of stock selection

- OW Europe vs US

• Key longs: Materials, Industrials, Discretionary
• Key shorts: Utilities, Pharma, Staples

To see full report: EQUITY STRATEGY