Investing.com -- Emerging market (EM) equities remain under pressure, with JPMorgan strategists advising caution despite their underperformance and low valuation metrics.
In a note Monday, JPMorgan highlighted several key reasons for maintaining an underweight (UW) position on EM equities compared to developed market (DM) equities.
EM stocks have endured another year of underperformance, marking the fourth consecutive year, with the bank noting a cumulative lag of 45% against DM equities since 2019 in USD terms.
The MSCI EM index has not only reversed the gains made during the September China stimulus but has also hit new relative lows.
While EM equities are currently cheap and under-owned, JPMorgan sees potential upside only if there are more favorable tariff announcements or aggressive stimulus from China.
However, the firm remains skeptical, stating, this is not a “‘close your eyes and buy EM’ moment.”
They have consistently recommended fading any EM bounce and staying underweight EM relative to DM equities.
For a more sustained recovery in EM performance, JPMorgan outlines several prerequisites: more clarity on tariffs, significant China stimulus, a peaking US dollar, and a narrowing gap between manufacturing and services.
They note, "The divergence in business confidence between the US and non-US is likely to keep widening," emphasizing the potential for policy dominated by trade and geopolitics under Trump’s administration.
Moreover, the firm expresses concern over weak consumer and housing activity in China and record-low Chinese bond yields, signaling a challenging environment. They conclude that while EM equities are at price relative lows, more clarity on these drivers is needed before turning bullish on the sector.