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Investing.com -- JPMorgan has upgraded emerging market (EM) equities to overweight, citing a combination of improving macro conditions, supportive policy developments, and compelling valuations.
The move comes after four years of underperformance, during which EM equities lagged developed markets (DM) by 40%.
“EM risk-reward is improving,” strategists led by Mislav Matejka wrote. The upgrade, which comes after an earlier shift from underweight to neutral in the first quarter, is driven by several factors, primarily easing trade tensions.
The U.S. recently scaled back proposed tariffs on China, dropping the rate from 145% to 41%. “While this is unlikely to be the end of trade noise, we think that the worst of it is likely behind us,” the strategists said.
A softer U.S. dollar (USD) is also seen as a key tailwind for EM equities, which have historically traded inversely to the dollar. JPMorgan’s foreign exchange (FX) team expects further weakening in the second half of the year as growth outside the U.S. improves.
“They see USD weakening against the main crosses over the coming quarters due to improving growth trends outside the U.S.,” the strategists continued. “They also expect EM FX to stabilize against the dollar and believe that some reduction in recession risks could even help EM FX outperform the dollar.”
Within the EM space, JPMorgan sees country-specific opportunities, particularly in India, Brazil, the Philippines, Chile, UAE, Greece, and Poland. The bank described India as “a safe haven amid trade war 2.0,” citing strong economic momentum and policy support.
Brazil is expected to benefit from a weaker dollar and China uplift, while the Philippines stands out for its domestic focus and easing monetary policy.
JPMorgan also reiterated its positive view on China technology stocks and maintained an overweight on the mining sector. Despite recent volatility, the Wall Street giant noted that Chinese equities may benefit from policy support, improving liquidity, and upgraded GDP forecasts.
Among other EM sectors, the firm maintains its long-standing underweight positions on the Autos and Luxury sectors, despite the potential for some support should EM equities trade more positively, and remains cautious on the Energy sector.
While typically not a driving catalyst, Matejka highlights the attractive valuations in EM equities, which trade at 12.4x forward earnings compared to 19.1x for DM. “Global investor positioning to EM is low,” the strategists added, suggesting room for inflows.