JP Morgan has reiterated its bullish stance on emerging market equities, calling for further gains as investor participation widens, particularly in China.
The bank upgraded its view on the asset class earlier this year after a long period of caution and maintains an overweight recommendation versus developed markets.
Emerging markets have returned 17.8% in US dollar terms so far this year, outpacing developed markets by 660 basis points. China A-shares have started to move higher, and JPM sees further room for improvement as market breadth continues to expand beyond the technology sector.
The case for emerging markets rests on several pillars. First, the relative underperformance of recent years has left the space under-owned.
EM equities lagged developed peers by over 200% since 2010, and many investors remain structurally underweight China.
According to Wall Street bank, “the negatives are very well accepted,” but policy support and improved liquidity are beginning to shift sentiment.
Second, the outlook for the US dollar is seen as supportive. While a short-term bounce is possible after a sharp decline in the first half of the year, the longer-term trend is expected to be lower, typically a tailwind for emerging market assets.
Third, the Federal Reserve could turn more dovish in the months ahead. “EM tended to perform well when the Fed is cutting,” the bank noted, adding that 19 of the 21 emerging market central banks it tracks are expected to reduce rates in the second half of the year.
Valuations are also a draw. JP Morgan describes EM equities as “very attractive” on this front and continues to favour markets such as India, South Korea and Brazil. Within sectors, it remains positive on mining, having double-upgraded the group last quarter.
The sector has been the best performer in recent weeks, and a recovery in China’s domestic activity could provide a further lift.
The bank remains cautious on Chinese fundamentals overall, but believes the worst is priced in. “China domestic groups should perform better, too,” it argued, reinforcing the view that the rally in emerging markets has further to run.