JP Morgan now expects Grexit, downgrades European banks

European stocks will dip following the Greek referendum but that is not the script they will follow over the coming three to six months, JP Morgan said on Monday morning.

Nonetheless, the likely widening in government bond spreads will weigh on European banks, the best performing sector over the last three months.

Indeed, Grexit is now the base-case scenario for the US-based bank.

Due to the above, analyst Mislav Matejka decided to lower his weighting for Banks to 'neutral' from 'overweight' on a tactical basis. He also cut the weighting for European stocks in his mdoel portfolio to 'neutral' from 'overweight'.

Nevertheless, “we do not think weakness will be on the scale of 2011-12 experience,” Matejka wrote in a research report e-mailed to clients.

The ECB is a formidable backstop, Eurozone activity is rebounding, the euro is 20% cheaper versus a year ago and US growth is bottoming out.

Furthermore, given the difficulties Greeks will now face, after capital controls were imposed, each passing day makes it more likely that an even harsher deal than the one originally on the table will be agreed.

JP Morgan also points out it is not “excited” about 'defensives' – such as utilities and staples - given the backdrop of rising yields. They also remain cautious on commodities.

Telecoms are their prefered choice among 'defensives', hence its decision to upgrade the group to overweight from neutral. The Dax is also trading at a record discount versus the rest of the region in terms of price-to-earnings multiples.