J.P.Morgan has taken a more constructive stance on emerging market stocks, shifting its outlook to ‘Overweight’ from ‘Neutral’. The decision comes as trade relations between the United States and China show signs of improvement, coupled with a decline in the US dollar, both factors seen as supportive for these markets.
Recent negotiations between Washington and Beijing resulted in both sides agreeing to scale back tariffs over a 90-day period. The US will lower tariffs on Chinese imports to 30% from a previous 145%, while China will reduce duties on American goods to 10% from 125%. This easing of trade tensions has boosted hopes for a more stable global trading environment.
Analysts at J.P.Morgan note that this thawing in US-China relations removes a major obstacle for emerging market equities. Further, they expect additional momentum if the US dollar continues to soften in the latter half of the year.
Within emerging economies, the investment bank favors countries like India, Brazil, the Philippines, Chile, UAE, Greece, and Poland, and is increasingly optimistic about Chinese equities, with a specific focus on technology firms.
Although J.P.Morgan cautions that geopolitical uncertainties around trade are not entirely resolved, the analysts see the most severe market disruptions as largely over.
Emerging market stocks have shown resilience, with the MSCI EM index rising 9% year-to-date, benefiting as appetite wanes for traditional safe havens like the US dollar. The dollar index has fallen 7.5% so far this year.
Meanwhile, emerging market equities have underperformed their developed market counterparts by approximately 40% since 2021 despite these recent gains. J.P.Morgan highlights that EM stocks now appear undervalued, trading at 12.4 times forward earnings, a notable discount compared to the 19.1 multiple for developed equity markets.
