JPMorgan Chase & Co. dropped its buy recommendation on Chinese stocks, citing heightened volatility due to the upcoming U.S. election, as well as growth headwinds and weak political support.
China's rating was downgraded to “neutral” from “overweight” in the bank's emerging markets allocation, strategists led by Pedro Martins wrote in a note on Wednesday. The potential for a new trade war between Washington and Beijing could weigh on stocks, while China's steps to emerge from the economic downturn remain “disappointing,” they said.
“The impact of a potential Tariff War 2.0 (with tariffs rising from 20% to 60%) could be more significant than the first tariff war,” the analysts wrote. “We expect China’s long-term growth to be structurally down due to shifting supply chains, widening US-China tensions, and ongoing domestic challenges,” they added.
JPMorgan joins a growing chorus of global companies lowering their expectations for the Chinese stock market, following similar moves by former China bulls UBS Global Wealth Management and Nomura Holdings Inc. in recent weeks, signaling that excluding China is becoming a popular strategy for investors and analysts amid the country's bleak outlook and the prospect of better returns elsewhere.
Economists increasingly believe China will miss its 5% growth target this year, and many equity analysts are now recommending other options to their clients.
JPMorgan strategists suggested investors use the cash freed up by the China downgrade to increase exposure to markets in which the U.S. bank is already overweight: India, Mexico, Saudi Arabia, Brazil and Indonesia. They also noted the difficulty of managing China’s high weighting in MSCI’s emerging markets index and the rise of EM ex-China mandates.
New emerging market equity funds that exclude China are emerging and have already reached levels annual record of new launches of 19 set last year as investors seek higher returns outside the country. Meanwhile, outperformance from India and Taiwan puts each just a few percentage points further down the replacement China ranks first in emerging market stock portfolios.
In a separate note written by strategists including JPMorgan's chief Asia and China equity strategist Wendy Liu, the bank cut its end-2024 benchmark target for the MSCI China Index to 60 from 66 and for the CSI300 Index to 3,500 from 3,900. Those forecasts are still above the two indexes' current trading levels.
The the overwhelming majority Global banks now expect China's economy to grow 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 in a weak zone in September-October after the second quarter results,” Liu wrote. “At that time, the US presidential election, the Fed's rate decisions and the US economic growth outlook will be in the foreground.”
JPMorgan also increased the level of cash in its China equity portfolio from 1% to 7.7%, according to the report.
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