Markets

Stock market investors are 'piled up' in a historically failing trade, JPMorgan warns

Key Points
  • JPMorgan questions the trend to focus on so-called growth stocks.
  • The bank's small and mid-cap equity chief says history isnt that kind to investors who follow such a strategy.
  • Eduardo Lecubarri recommends investors in 2020 shoud look for firms that set acheivable targets.
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The market is currently "piled up" in what history shows is a loss-making trade, according to one of JPMorgan's top stock pickers.

Eduardo Lecubarri, the global head of small and mid-cap equity strategy at JPMorgan, told CNBC's "Squawk Box Europe" Tuesday that the common perception is currently that in a world of low growth, hunting for companies with the potential to expand quickly is the correct strategy.

So-called "growth stocks" typically generate earnings at an accelerated rate and can often be found in the technology or pharmaceutical sectors. One prime example being Apple.

Lecubarri said picking stocks in the expectation that earnings will continue to rise and drive the firm's share price higher has actually proven to be a failed strategy for many investors.

"You look at the last 20 years of Japan, every year you bought the highest decile of expected earnings growth stocks. You lost money almost every year," said the chief strategist, adding that those who focused on European firms using the same tactic would have suffered the same fate in almost every year since 1990.

Lecubarri said the current capital allocation showed many investors were possibly making the same mistake. "So today, the market is piled up in things that in theory is where you want to be, but historically have been a very painful trade," said Lecubarri.

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JPMorgan has identified that 2019 "alpha" — the gain that one stock makes over benchmark indexes such as the S&P 500 — was greatest when made off the back of earnings revisions.

The stock strategist said in some years it paid to pick regions or sectors to generate returns, but 2020 would be one where opportunities were found in individual firms, regardless of specialty or location.

"My recommendation is look at the stocks, forget about directional views this year. I'm focused on things that seem achievable, valuations that perhaps are not that demanding and a business that is not that dependent on the macro, and I think that would be a safe place to be," he said.

Despite the call to focus on stocks, JPMorgan has identified Ireland, Italy and Portugal as European countries that are showing "pent-up performance." The investment bank said that Ireland could benefit as a post-Brexit trade route to the U.K., Portugal has accommodative tax policies and recent changes to Italian legislation may attract fresh investment into its stock market.