European Stocks Downgraded by JPMorgan Asset Strategist Shairp

Sept. 26 (Bloomberg) -- European stocks will trail their U.S. and Japanese peers in coming months because earnings expectations are too optimistic, according to JPMorgan Asset Management strategist David Shairp.

Shairp, a global strategist for JPMorgan Asset Management's Multi-Asset Group, downgraded his stance on equities in continental Europe to ``underweight,'' meaning investors should hold fewer of the shares than are represented in benchmarks. He has ``overweight'' recommendations on so-called U.S. large-cap stocks, U.K. shares and in the Pacific region excluding Japan.

``The European business cycle is clearly slowing and this has yet to be reflected in earnings expectations,'' London-based Shairp wrote in a note to investors distributed yesterday. ``Moreover, valuations are less attractive historically than in the U.S.''

JPMorgan Asset Management, a unit of JPMorgan Chase & Co., the third-largest U.S. bank by assets, manages $1.1 trillion.

The Standard & Poor's 500 Index in the U.S. has gained 2.8 percent since the Federal Reserve on Sept. 18 lowered its benchmark interest rate to 4.75 percent from 5.25 percent. The cut was aimed at preventing losses on subprime mortgages from pushing the world's largest economy into recession.

In the same period, Europe's Dow Jones Stoxx 600 Index has added 1.3 percent.

`Proactive Stance'

``With the Fed taking a more proactive stance than the European Central Bank or the Bank of Japan, we expect U.S. equities to outperform Europe and Japan,'' Shairp wrote. The market's ``consensus'' forecast of 3 percent growth in annualized earnings this year in the U.S. ``looks realistic,'' he added.

The Stoxx 600 advanced 18 percent in 2006, beating the 14 percent gain for the S&P 500 and the 7 percent rise for Japan's Nikkei-225 Stock Average benchmark.

The Global Multi-Asset Group rates Japanese and emerging- markets equities as ``neutral,'' and U.S. ``small-caps'' as ``underweight.'' The group is ``overweight'' U.S. and U.K. long- duration bonds.

The note didn't give a time frame for the recommendations.