Time to lock-in some profits in cyclicals, JP Morgan says
Markets will continue to head higher overall but the time has come to 'lock-in' some profits in 'cyclicals', strategists at JP Morgan said.
In particular, the strategists pointed out that cyclicals had run up well ahead relative to 'defensives' on the basis of what bond yields would imply.
Readings on the relative strength index for cyclicals were also in 'overbought' territory, they said.
As well, inflationary pressures were mounting and bond yields were more likely than not to head higher from present levels.
Nevertheless, it remained true that the typically positive seasonality seen in November and December was still in play and data on activity levels was "holding up very well".
Furthermore, overall equity valuations were still attractive relative to those for bonds and on credit.
Worth noting, in the US companies' third quarter results had been "robust" and projections for 2018 earnings per share had yet to price-in any prospect of a tax cut, JP Morgan said.
"Also, from these levels of ISM Cyclicals typically didn’t tend to outperform, and their valuations vs Defensives are starting to look stretched. Big picture, we expect USD to continue bottoming out, which has implications for regional allocation," they added.
Linked to the above, the strategists reiterated their September downgrade on Emerging Markets and their recommendation to reinvest those proceeds into Japan.
Eurozone equities were also kept at an 'outperform' and UK at 'underweight'.