JPMorgan Says Europe Is Different From Japan And in a Good Way

(Bloomberg) -- Investors often compare Europe with Japan these days but, according to JPMorgan Chase & Co., their assets are largely sending very different signals.

While tumbling German bond yields, shrinking populations and underperforming European financial stocks resemble the situation in Japan, JPMorgan says other indicators -- from equities to debt levels -- place Europe in a more favorable position.

John Normand, JPMorgan’s head of cross-asset fundamental strategy, points out that the euro-area’s expansion and inflation may be weak, but nominal growth and core inflation beat Japan’s deflation. A decade after the European debt crisis, leverage levels in the region’s private sector have stabilized. In contrast, Japanese households and companies spent 20 years from the mid-1990s reducing their debt, fueling what JPMorgan calls a balance-sheet recession.

“Although the Euro area is most-often referred to as having Japanized, this term only fits the region on a few criteria,” said Normand in a note. “Europe’s position looks more favorable than Japan’s did at a similar stages.”

And whereas Europe mainly resembles Japan through its low bond yields, the region’s equities couldn’t be more different as they “never” experienced Japan’s multi-year earnings recession or dramatic price-to-earnings derating, said the strategist.

“Japan’s equity P/E derating has been unique because its pre-crisis overvaluation was so extreme,” said Normand.

The Stoxx Europe 600 Index is up 33% in dollar terms over the past 20 years, compared to 12% for the Topix.

Economists and the likes of Pacific Investment Management Co. have warned this year that European markets are spiraling toward their own version of the Japanese slowdown that began two decades ago as the euro area confronts low interest rates, a grim economic outlook, falling volatility and the dissemination of negative bond yields.

JPMorgan’s Normand cautions that while the region has so far managed to escape Japan’s fate, more European indicators could yet turn Japanese due to sluggish growth, the low likelihood of significant fiscal stimulus in nations such as Germany and reduced returns under the European Central Bank’s future quantitative easing.

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