JPMorgan Chase & Co. dropped its buy recommendation on Chinese stocks, citing heightened volatility around the upcoming U.S. election as well as growth headwinds and tepid political support.
China’s rating was downgraded to neutral from “overweight” in the bank’s emerging market allocation, strategists led by Pedro Martins wrote in a note on Wednesday. The prospect of another trade war between Washington and Beijing could weigh on stocks, they said, while China’s moves to lift itself out of its economic slump remain “disappointing.”
“The impact of a potential second tariff war (with tariffs increasing from 20% to 60%) could be more significant than the first,” the analysts wrote. “We expect long-term Chinese growth to be structurally downward due to supply chain shifts, widening US-China conflicts, and ongoing domestic issues.”
JPMorgan has joined a growing group of global firms that have cut their outlook for China’s stock market, following similar moves by earlier Chinese firms such as UBS Global Wealth Management and Nomura Holdings Co., Ltd. In the past few weeks, this suggests that excluding China has become a popular strategy among investors and analysts amid the country’s timid outlook and the potential for better returns elsewhere.
Economists increasingly believe China will miss its growth target of about 5% this year — and many equity analysts are now directing their clients elsewhere.
JPMorgan strategists suggested that investors use the money freed up by China’s downgrade to increase their exposure to markets the U.S. bank is already overweight: India, Mexico, Saudi Arabia, Brazil and Indonesia. They also pointed to challenges in managing China’s large weighting in the MSCI Emerging Markets Index and the growth of emerging market mandates excluding China.
New emerging market equity funds that exclude China are starting to emerge, and they are already having the same success as equity funds in other emerging markets. Annual record of new launches Of the 19 countries that recorded growth last year as investors sought better returns abroad, the outperformance of India and Taiwan, meanwhile, puts each within a few percentage points of replacing China ranks first in emerging equity portfolios.
In a separate note by strategists including Wendy Liu, chief Asian and Chinese equity strategist at JPMorgan, the bank lowered its end-2024 baseline target for the MSCI China Index to 60 from 66, and for the CSI300 to 3,500 from 3,900. Those forecasts are still higher than where both indexes are currently trading.
the The vast majority Ninety percent of global banks now expect China’s economy to grow by less than 5% this year, with Bank of America Corp. the latest to cut its forecast. JPMorgan’s Haibin Zhu also cut China’s 2024 GDP growth forecast to 4.6%.
“We believe the market may trade on the weak side during September and October after the Q2 results. During this time, the US presidential election, the Fed’s interest rate decisions and the US growth outlook will be in the forefront,” Liu wrote.
According to a report, JPMorgan also raised the level of cash in its China equity model portfolio to 7.7% from 1%.
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