By [Your Name], Senior Journalist
September 5, 2024
JPMorgan Chase & Co. has reversed its buy recommendation for Chinese stocks, citing increased volatility ahead of the upcoming U.S. elections, economic headwinds, and insufficient policy support. In a significant shift, the bank downgraded China from overweight to neutral in its emerging markets allocation, strategists led by Pedro Martins announced in a note on Wednesday.
The decision by JPMorgan, one of the world’s largest financial institutions, reflects growing concerns about the Chinese economy’s prospects and the potential for renewed trade tensions between the U.S. and China. The strategists highlighted the possibility of another trade war, which they ominously termed Tariff War 2.0, predicting that its impact could be more severe than the initial conflict.
The impact of a potential ‘Tariff War 2.0’ (with tariffs increasing from 20% to 60%) could be more significant than the first tariff war, the analysts wrote. We expect China’s long-term growth to trend down structurally due to supply-chain relocation, the expansion of US-China conflicts, and continued domestic issues.
The downgrade comes on the heels of similar moves by other major investment firms, including UBS Global Wealth Management and Nomura Holdings Inc., in recent weeks. These actions signal a broader trend among investors and analysts who are increasingly looking elsewhere for better returns as China’s economic outlook dims.
Economists are now widely predicting that China will miss its growth target of around 5% for this year. The country’s economic momentum has been waning, with a persistent property slump and a tight fiscal stance contributing to the slowdown. According to data from the National Bureau of Statistics and Bloomberg, the challenges facing the Chinese economy are becoming increasingly apparent.
JPMorgan’s strategists suggested that investors should reallocate funds previously invested in China to markets where the bank is already overweight: India, Mexico, Saudi Arabia, Brazil, and Indonesia. They also noted the challenges in managing the high weight of China in the MSCI Emerging Markets Index and the growing popularity of EM ex-China mandates.
New EM equity funds that exclude China are sprouting up, matching the annual record of new launches set last year. This reflects a shift in investor sentiment, with many seeking better returns outside of China. The outperformance of India and Taiwan has also put them in contention to replace China’s top spot in EM equity portfolios.
In a separate note, JPMorgan chief Asia and China equity strategist Wendy Liu and her team cut the bank’s end-2024 base target for the MSCI China Index to 60 from 66, and for the CSI300 Index to 3,500 from 3,900. Despite these reductions, these predictions remain above the current trading levels of the two indexes.
The strategists also warned of potential market volatility during September and October, with the U.S. presidential election, the Federal Reserve’s rate decisions, and the U.S. growth outlook being key factors that could influence market sentiment. We think the market may trade on the weak side during Sept-Oct after Q2 results, Liu wrote.
In response to these economic headwinds, JPMorgan has raised the cash level in its China equity model portfolio to 7.7% from 1%. This adjustment is a clear signal that the bank is preparing for potential market turbulence in the coming months.
The downgrade by JPMorgan and other global firms underscores the challenges facing the Chinese economy and the broader implications for global markets. As the world watches the unfolding events, it remains to be seen how China will navigate these complex economic and political waters.
Views: 0