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Investing.com -- European domestic stocks are likely to continue outperforming their export-focused peers, according to JPMorgan (NYSE:JPM) strategist Mislav Matejka, who highlights rising trade uncertainty and expected U.S. dollar weakness in the second half of the year as key drivers.
“So far year-to-date, domestic stocks are beating exporters in [the] Eurozone, in [the] UK, and in Japan,” Matejka said, noting the move gained momentum after March.
“With likely further USD weakness in 2H, and with continued mixed trade headlines, domestic names are likely to keep leading,” added the analyst.
JPMorgan continues to recommend staying long domestic baskets relative to exporters in both the Eurozone and U.K. “Notably, valuations of domestic stocks remain attractive vs Exporters in Eurozone,” the note added.
Small-cap stocks are also expected to benefit, particularly in Europe and Japan.
“Eurozone small caps are outperforming so far ytd, after 3 challenging years, and Japanese small caps are ahead, too,” Matejka said. “U.K. is not there yet, but MCX could be catching a bid in light of the recent takeout deals.”
He added that “UK equity market, and UK small caps continue to screen record cheap.”
JPMorgan also addressed the potential implications of the U.S. tax bill, specifically Section 899.
“Uncertainties over the exact interpretation are high,” but the provision could “make capital flows into [the] U.S. less attractive.” A weaker dollar would “implicitly help Domestic vs Exporters trade internationally.”
The note also flagged that “dividend strategies should favour International exposure more,” and that U.S. returns could become “less attractive for International investors” due to tax policy changes.
With fiscal concerns mounting and geopolitical tensions lifting oil prices, JPMorgan maintains that “USD could be lower” and “tariffs are much higher than what most were assuming at the start of the year,” reinforcing the tilt toward domestic exposures.
