US equities are trading at the most "extreme undervaluation" in nearly two decades, JPMorgan Asset Management (JPMAM) believes.
According to JPMAM’s composite valuation indicator, US stocks are at the lowest valuations in the 17-year history of the data.
JPMAM says investors are refusing to take bets at present and are nervous about making large moves into equities or bonds.
It pointed to the latest edition of Merrill Lynch’s Global Fund Manager Survey, which showed 41% of global fund managers are overweight in cash.
“High levels of cash not only reflect risk aversion but also the risk of redemption,” the JPMAM report reads.
“However, fund managers are not paid to be bankers and it seems reasonable to assess the factors that might tilt this wall of cash into markets (equities or bonds).”
While stocks may be currently valued at extreme levels, JPMAM says the Federal Reserve is likely to make further interest rate cuts.
In the UK, JPMAM agrees with the Bank of England’s (BoE) Inflation Report, which told households to brace themselves for a period of reduced living standards.
"It very much looks as if the Bank is seeking to manage expectations of households and markets,“ JPMAM says.
“By invoking a mild stagflationary scenario, Mr (Mervyn) King has sought to downplay scope for falling interest rates.”
However, JPMAM says the UK is in a “much weaker” position than suggested by the BoE.
“Delay by the BoE in cutting rates could lead to more rapid cuts later in the year, which would be negative for sterling, threatening a more disruptive period of depreciation,” it says.
“Managing expectations could therefore prove to be more expensive in terms of lost output and currency volatility.”
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