Equities set for Q4 rally: JPMorgan

Market indicators are pointing to an equity rally in the fourth quarter of 2015, according to analysts at JPMorgan Cazenove.

The firm believes stocks will enjoy a resurgence following the significant slump seen in the third quarter – in part because it gauges that bearish sentiment has been overdone.

The prediction is also influenced by the investment bank’s expectation for a stronger economic performance in areas such as China.

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The bank said it had sympathy with investors’ concerns over a variety of issues – such as the loss of credibility of central banks and the risk of a serious crisis in emerging markets – but said the risk-reward analysis has now changed.

De-risking has already gone too far, according to the firm. Hedge fund beta – the level of net exposure to the market – has fallen below zero, the analysts pointed out.

Meanwhile the proportion of European stocks trading above a 52-week moving average has fallen to just 26 per cent.

The bank said: “Sentiment is bearish – the proportion of bulls is the lowest since 2009. This [is] a good contrarian indicator.”

The market turmoil of August 24, when markets followed the Shanghai Composite index downward, was followed by a further struggle for equities in September. Most major indices sustained their worst quarterly performance since 2011. The FTSE 100 fell 6 per cent in the third quarter, while the FTSE World dropped 5.4 per cent in sterling terms.

JPMorgan Cazenove bel­ieves an improving macro picture can support a market turn, with sentiment boosted by a better economic performance in China and the eurozone. The bank said Chinese policy action is materialising “on multiple fronts”, and added that property transactions and house prices also showed signs of stabilising.

“Our call is that Chinese growth gets better over the next three to six months, not worse. We believe more [policy action] is forthcoming, especially on the credit front.”

Others are also upbeat on the prospects for the final quarter. Trevor Greetham, head of multi-asset at Royal London Asset Management, said a fall in commodity prices could put downward pressure on inflation, with developed world central banks forced to adjust monetary policies to boost domestic economies.

He said: “Volatility could remain high for a while, but with investor sentiment already very depressed, seasonality turning positive and central bank action likely, we expect stockmarkets to rally into year-end.”

The JPMorgan Cazenove note also struck a positive tone with regard to European economies. “The eurozone recovery is fully on track… Italian consumer confidence has hit a 10-year high,” it said.

While the bank admitted US rate rises could be delayed by an economic slowdown, it argued this could work well for commodities – and urged investors to close commodity shorts ready for an improvement.

Uncertainty over the prospect of a rate rise remains after Federal Reserve chair Janet Yellen struck a dovish tone at the September press conference, and US jobs data failed to meet expectations.