Seven Reasons to be Overweight Equities

“Markets are hoping for answers from the Fed on its easing program this week —  mainly, when and how it’s going to start paring back. They want soothing words, and, from the looks of stock futures on Monday, they fully expect to get them.

There have been some worrying signs surrounding stocks lately: a sharp selloff inemerging markets, soaring bond yields and volatile markets overall.

But no signs of panic at either J.P. Morgan Cazenove or Credit Suisse, where strategists are staying overweight on equities.

Mislav Matejka and other strategists at J.P. Morgan Cazenove in a note on Monday list their reasons for optimism:

1. The rise in U.S. bond yields is being driven by a positive growth-inflation trade-off. Worried that the backup in real yields is too fast and could be a problem for recovery and a fall in inflation that could trigger deflation? “We think these fears will morph into: real rates are just catching up with where private economy, ex. fiscal drag, already is,”  says  J.P. Morgan’s Matejka.
2. Investor sentiment has turned more bearish, and that’s healthy. Case in point, Japan equitiesJP:NIK +2.68%, which have moved out of pricier territory on price/book metric, says Matejka.
3. Emerging markets are selling off, but they’re not headed for a full-blown crisis because current-account balances and debt positions are better now than they were then, says Matejka.

Putting its money where its mouth is, J.P. Morgan is lifting cyclicals to neutral from underweight — saying the sector is still underperforming even after May’s rebound, but it doesn’t advise an outright long. The analysts don’t see yields backing up much further in the near term. Mining names are being added — closing out a longstanding bearish stance on miners and steel in particular — and energy is being lifted to neutral from overweight, given “extreme cheapness” price/earnings, price/book. On the downside, telecom stocks are being cut to underweight from neutral…”

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