 "JP Morgan")
JP Morgan has turned bullish on emerging markets (EM) equities and moved them up to an overweight rating. EM, they said, had four years of weak performance versus the developed markets (DM), lagging cumulatively by 40 per cent since 2021.
"We upgraded our EM versus DM stance from underweight to neutral, and we now move it further up, to overweight. Within EM, our EM strategy team continues to prefer markets with higher domestic exposures - India, Philippines, Brazil, Greece, Poland, and UAE, - and strong bottom-up idiosyncratic catalysts, such as Chile, and Korea," wrote analysts at JP Morgan in a recent coauthored note.
EM valuations, the note said, appear attractive, at 12.4x forward P/E, versus DM at 19.1x, and global investor positioning to EM is low, in particular to China.
India, JP Morgan believes, remains 'trade-insulated' and is a safe haven amid trade war 2.0 besides being cyclically well-positioned. That apart, RBI's shift of stance to 'Accommodative', two consecutive rate cuts and liquidity infusion measures, they believe, are growth conducive.
"Ongoing recovery in rural demand, reduced taxes coming into effect from April end, easing monetary policy regime, declining inflation, normal monsoons and soft commodity prices bodes well for FY26 earnings. India is likely to see the highest 2025 GDP (gross domestic product) growth in the JPM Global universe," the note said.
Change of stance
At a broader level, their change in stance as regards the EM universe is a confluence of factors. Firstly, JP Morgan believes that the worst of trade wars is over even though there could be some 'noise' related to the tariffs going ahead.
Secondly, they expect the US dollar (USD) to stay soft this year, which would help EM. "EM historically has traded inversely to the dollar, and the big question is whether the last 15 years’ downtrend in EM and the strong USD could be ending," the note said.
EM equities generally underperformed DM since 2010, the 15-year period during which the USD was strengthening, data shows. EM equities tend to do better against the backdrop of a weaker dollar, and vice-versa. In that respect, if the USD shows more sustained weakness that would help EM trade, analysts at JP Morgan said.
Thirdly, JP Morgan expects US bond yields to move up, potentially driven by prospects of more aggressive tax cuts being attempted in the backdrop of elevated deficits, and by the likely rise in US inflation in the backdrop of tariffs.
“If the hard data were to converge with the soft data over summer, the Fed could become more supportive, and typically EM preferred falling rates and a dovish Fed. Our economists see reduced US growth risks, given the recent positive US-China trade headlines, but this is not to say that US activity is out of the woods, and they still argue that payrolls could turn negative in the summer,” the note said.
