Global equities check-in: Europe strong, Asia rebuilding

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Edwina Lowe: Hi and welcome to J.P. Morgan's Making Sense. I'm Edwina Lowe from our Data Assets and Alpha group and today I'm delighted to be sitting down with my colleagues Federico Manicardi, who heads International Market Intelligence, and Jigar Vakaria from our Positioning Intelligence team. So Feday, Jigar, thank you for joining me today.

Federico Manicardi: Thank you for having us, Edwina.

Jigar Vakharia: Thanks, Edwina. It's a pleasure to be here.

Edwina Lowe: So we're now past the midway point for what has been a pretty eventful year for global equities thus far, with the MSCI AQUI up about 15% year to date. But amidst that there has been quite a lot of dispersion and of course a backdrop of continued geopolitical uncertainty. At our Mid-Year Outlook episode, we had a constructive outlook for markets, albeit recognising those key risks. But today we're going to specifically focus on international markets. So let's start with Europe. So Federico we've seen a strong performance in European equities with the Stock 600 hitting fresh all-time highs just a couple of days ago, mainly supported by some respite and geopolitical tensions in the Middle East. We've also seen a decent earnings season. So Fede, can you take us through what we're seeing in Europe and how this relates to your general macro views?

Federico Manicardi: I'll actually start with the global picture. Remember, more than half of the revenue exposure for European companies comes from international markets. So what happens in the world really sets the tone for Europe. Right now the background is very strong. The global composite PMI is consistent with above potential growth and JPMorgan Economist just made a fairly material upgrade to their global growth forecast for the second half of the year. We expect 2.6% annualised growth rate led by the US, the euro area and non-China Asia. What will sustain the cycle is a tech boom, but crucially also non-tech capex, which is now picking up. That matters because it broadens the base of growth and this should feed through stronger hiring and stronger consumption globally. Turning to Western Europe specifically, then stand out is clearly the strike of better than expected consumer and lending data. And that's despite the energy price shock that hit the region earlier in the year. This also adds to the significant fiscal boost that is underway in Germany. All told, we think growth should be around one and a half percent for the rest of the year. Earnings have been very strong as well. Delivery this quarter was crucially very broad based and around 63% of companies actually beat. What was really interesting is that the gap between US and European EPS growth has also narrowed meaningfully and both regions are running at 12% year on year on a median basis.

Edwina Lowe: And Jigar, turning to you, could you give some context on what we're seeing from a positioning perspective?

Jigar Vakharia: Hedge funds are still running with relatively low net exposures, and they have continued to trim gross exposure as the summer has progressed, especially in the US. At the same time, we have seen momentum strategies come under pressure. Selling picked up in momentum baskets and exposures have pulled back from the previously very stretched levels. That said, our tactical positioning monitor to track US equity triggered an attractive setup in last week of July when four week change hit minus 1.5 standard deviation and the level of positioning fell to minus 0.6 standard deviation. Moving to Europe, we have seen positioning has rebounded faster than in the US, with flows turning positive and performance improving.That said, our European positioning measure sits at 47th percentile. So while investors are incrementally more constructive on Europe, the buying remains selective and defensive in nature. Investors are mindful of macro and geopolitical risks, but Europe is increasingly viewed as one of the more attractive regional opportunities in the current setup.

Edwina Lowe: And turning to APAC, where the picture is a little more nuanced, Fede, what are you seeing there?

Federico Manicardi: The outlook for APAC is actually quite optimistic too, though it really breaks down into three pieces. Japan is a bit like Europe, a global value and cyclical play. Growth should run around 1% for the next couple of years. Business sentiment mirrored the strength in global activity and fiscal is a key driver behind domestic demand. A good reminder of this is the recent food consumption tax cut, which has moved from 8% to 1%. EMAX China, which includes Korea and Taiwan, is where we are relatively most bullish because you've got a real convergence of cyclical and secular forces. There is a tech boom and strong external demand for AI hardware, and this is throwing off a clear positive spillover into consumption as well as business investment. China is probably where the cyclical case is a bit less clear-cut. GDP is low to 4.3%, below the government's 5% target, and the economy is really bifurcated. You have strength in exports and policy priorities, such as tax self-reliance and advanced manufacturing, but that is offset by soft domestic demand, consumption, and investment. That said, we do expect a bit of a bounce in the second half of the year after the July Politburo signal the fiscal impulse should come back.

Jigar Vakharia: I agree with Fede. The APEC backdrop is becoming increasingly constructive as the intense risk reduction seen earlier in the summer begins to fade. Flows across Asia have largely stabilized and investors are rebuilding exposures, with technology the standout sector. Semiconductor stocks are starting to attract inflows. Korea, Taiwan, and related growth themes are leading the recovery, at least on the performance front. On hedge fund performance, July performance was weakest in over many months, where hedge funds were down minus 6%, though August seems to be staging stability with hedge funds up 0.7% month to date. Overall, Asia is quietly moving from stabilisation to accumulation. The degrossing pressure has eased, technology is attracting flows, and semiconductors are once again emerging as the region's preferred risk on trade.

Edwina Lowe: So it sounds like cyclical earnings and the positioning picture should mean the broadening trade via international equities and global cyclicals should keep running. But what about thematics? This year has been an important year for investable themes. And in fact, in July, we saw a volatile unwind in the crowded AI tech names, and a sharp reversal in the momentum factor. What are the key themes that you're monitoring, Fede?

Federico Manicardi: I'm going to start with AI, where we see a lot of opportunities. We've barely seen any fundamental signs of weakness. Scaling laws are intact, token demand is strong, profitability is improving across the ecosystem, including cloud providers, and CapEx upgrades keep coming through. The sector is emerging from significant degrossing, and investors are engaging with perceived winners. We particularly like semi-cap equipment, opticals, electricals, and the power story. We even think memory can come back. Supply additions are unexpected before 2028, and demand broadening from GPU to CPU is a key source of upside surprises. However, we do expect a bit more dispersion from here. So I would also watch pockets of software on the commoditization of LLMs and China Cloud after US hyperscalers improved the CapEx versus ROI narrative. Another theme that needs focus is miners. Here, the joint Japan-US intervention has reinvigorated the basement trade at a point where a positioning setup in gold is quite attractive. And once the situation in Hormuz stabilizes, we would expect increasing demand from central banks. Meanwhile, copper remains our preferred structural exposure within industrial metals. We like the intersection of industrial policy consideration and the fundamental demand from AI electrification. That also comes against a genuinely tight supply picture, which is only going to get worse from here. I would also mention in the low-vol space healthcare, there is a rare mix of durable, defensive earnings growth with technology-like profitability, and we expect earnings to accelerate materially into 2027. Finally, on the cyclical space, I think banks will stay in focus. I lean over Japan, over European banks. The team still seems to underprice a higher terminal BOJ rate. And while European banks are fundamentally well-supported, the debate right now is how much upside is left in the near term.

Jigar Vakharia: Following on the themes from the positioning side, technology sector is clearly at the forefront of global themes. But what's notable here is that positioning is being rebuilt rather than chased. Hyperscaler exposure has bounced from multi-year lows back towards long-term averages, while software is recovering but still below average. Momentum exposure has fallen from extremely stretched levels. The Asia story is arguably the most compelling, and importantly, it's broader than just AI. We are also seeing buying in materials, energy, real estate, and financials, suggesting investors are positioning for a wider cyclical recovery. In Europe, the preference is more defensive and selective tech alongside financials. So the overarching theme is that technology leadership is re-emerging globally, but Asia appears to have the broadest participation beneath the headlines AI trade.

Edwina Lowe: So you're both broadly constructive global markets due to the confluence of cyclical and secular themes. But what about the risks? Clearly, there is the obvious risk of ongoing geopolitical uncertainty in the Middle East and around the reopening of the Strait of Hormuz. But are there other risks that you're looking out for?

Federico Manicardi: Yes first is interest rates. Stocks right now are very sensitive to bond yield, and we could be facing two different type of headwinds. The most salient is around rate hikes. JP Morgan see hikes coming from all G4 central bank, starting with the ECB in September and the Fed in December. The other headwind is around term premium, which remains an issue globally, given the direction of fiscal. A second set of risks, like you mentioned, is around geopolitics. OECD oil inventories and European natural gas inventories are running quite thin, and it's possible that traffic through the Strait of Hormuz doesn't really normalize until later into the year. Meanwhile, trade could eat up as the EU-China deadline approaches in October. Third, I would also mention politics. Midterm seasonality is always challenging. You get that dip and rip type of a pattern, but they're also seeing increased focus on European politics towards the end of the year. The UK budget comes at the end of October, but France, Italy, and Spain are all having elections in the first half of 2027. Finally, there is AI. Adoption is increasing at an accelerating rate, but there is always concentration and disruption risk that could come from fierce competition across the various AI labs.

Edwina Lowe: And Jigar what are the key risks that you're looking out for?

Jigar Vakharia: From a positioning perspective, the biggest risk is probably the disconnect between stronger market performance and still cautious investor positioning. Markets have recovered quickly, but hedge funds continue to run below prior exposure levels, particularly when net leverage remains near 12-month lows and positioning metrics remain below or near historical averages across major regions. The other thing we're watching is whether the rally broadens beyond the narrow group of tech winners. Europe's defensive leadership and Asia's wider cyclical participation are encouraging early signs of that. In the near term, investor sentiment is clearly improving, but conviction is still fragile enough that any macro disappointment could slow the ongoing rebuild of exposures.

Edwina Lowe: So, to reiterate, you're both broadly constructive global markets. From a positioning perspective, hedge funds are warming up to risk again, albeit selectively. Europe is rebuilding positioning. Asia is rotating back into tech, and across the board, the preferred trade remains to own good quality growth names, including hyperscalers, software and semiconductors. That's not to lose sight of the risks that you both highlighted, which could create some pockets of turbulence in the shorter term. Well, I think that's a pretty good place to wrap up. So thank you both, Jigar and Fede, for sharing your insights today.

Federico Manicardi: It's great to be here, Edwina.

Jigar Vakharia: Thanks, Edwina. It's a pleasure.

Edwina Lowe: Thank you also to our listeners for tuning into this Making Sense podcast. If you have questions or if you'd like to get in touch, then please do go to our website, jpmorgan.com forward slash market dash data dash intelligence. And with that, we will close. Thank you.

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