While JP Morgan identifies some selected opportunities in the peripheral markets, it does not advise to overweight the group, as it continues to see the following headwinds:
a) Peripheral valuations are not exciting and EPS projections appear optimistic, b) fiscal drag continues, c) real rates remain uncomfortably high, d) the start of ECB tightening will be an additional negative for these countries.
JP Morgan remains of the view that the latest Euro policy announcements are a move in the right direction, reducing systemic risk.
“We reiterate our recent upgrade of banks to “overweight”, a sector which will benefit from lower cost of capital, was the worst performer in the last 6-12 months, but is attractively priced and will be supported by a recovery in credit demand”, it said.
The potential start of ECB tightening will be a headwind for countries with relatively more leveraged private sectors. Higher ECB rates is the last thing peripheral Europe needs at this point.
JP Morgan thinks long Italy and short Spain is an interesting pair trade.
Moreover, the potential imminent tapping of liquidity provision by Portugal and some uncertainty over the parliamentary approval of recent EFSF measures are raising questions over whether Euro crisis has the ability to take centre stage again.
Portuguese and Irish spreads to Germany have widened, but Italian, Spanish and Greek have improved significantly, JP Morgan stated.
The improvement in credit demand is evident from all cross-sections of the economy, large companies, small companies, unsecured and secured household credit.
Additionally, capital shortfall of banks was not dramatic, according to JP Morgan, adding that it favours French, Italian and Swiss banks.
source: CAPITAL
