European Quant Strategy Style Investing_ Is the QMI ‘Recovery’ now a defensive trade_

Summary of J.P. Morgan's European Quantitative Strategy Conference Call Company and Industry - Company: J.P. Morgan - Industry: European Equity Markets and Quantitative Investment Strategies Key Points and Arguments 1. Current Market Sentiment and Economic Indicators - Global equity indices are near all-time highs, with bullish investor sentiment, although it is slightly declining from recent peaks [11][12] - Central banks are easing policies, and the US dollar is weakening, contributing to a favorable environment for small caps and value stocks [11][12] - Economic growth expectations are fragile, leading to consensus profit downgrades, suggesting a defensive sector stance may be necessary [11][12] 2. European Quant Macro Index (QMI) Insights - The European QMI indicates a 'Recovery' phase, with the index rising from a recent trough, although it remains in the bottom third of its historical range [11][12][28] - Three inputs are rising (changes in European bond yields, ECB money supply growth, SEK/USD exchange rate) while three are falling (German manufacturing confidence, OECD economic lead indicator, consensus global EPS revisions) [2][28] - The QMI's upward trend is expected to be sustainable over a 12-month view, but short-term downside risks are present [11][12][28] 3. Sector Performance Dynamics - Defensive sectors are outperforming cyclical sectors, which is atypical during a recovery phase [17][18] - Traditional defensive sectors such as Communication Services, Real Estate, Financials (Insurance), and Utilities are preferred, while cyclical sectors like Technology, Industrials, and Discretionary rank poorly [17][18] - The relationship between cyclical and defensive sectors is evolving, with defensive sectors potentially outperforming even as cyclical styles gain traction [17][18] 4. Investment Style Recommendations - J.P. Morgan recommends overweighting Value and Low Size (Small Caps) while underweighting Momentum, Quality, and Low Volatility [8][9] - The correlation between Value and Momentum is expected to turn negative, indicating a shift in investment strategy [40] - The analysis suggests that as the yield curve flattens, Value and high-risk stocks may benefit, while Growth stocks could underperform [21][24] 5. Risks and Considerations - There is a growing risk that high-quality stocks may become more volatile, particularly if the QMI continues to rise [30] - The potential for a reversal in long/short momentum strategies poses a risk to investors' portfolios [12][17] - The divergence between the QMI and equity versus bond returns has narrowed, raising concerns about the sustainability of equity performance relative to bonds [31] 6. Conclusion - The current market environment presents a complex landscape where traditional sector relationships are shifting, and defensive strategies may be warranted despite a nominal recovery phase [11][12][17] - Investors are advised to navigate carefully, focusing on sector and style selection as the macroeconomic backdrop evolves [44] This summary encapsulates the critical insights and recommendations from J.P. Morgan's conference call regarding the European equity market and quantitative strategies, highlighting the nuanced dynamics at play in the current investment landscape.