JPMorgan Chase & Co. has cut its buy recommendation on Chinese stocks, citing increased volatility around the upcoming U.S. election along with growth headwinds and weak policy support.
China was downgraded to neutral from outperform in the bank’s emerging markets allocation, strategists led by Pedro Martins wrote in a note on Wednesday. The possibility of another trade war between Washington and Beijing could weigh on stocks, while China’s moves to escape its economic slowdown remain “unimpressive,” 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 weaker due to supply chain shifts, the deepening of the US-China conflict and ongoing domestic issues,” they added.
JPMorgan joins a growing number of global firms lowering their expectations for China’s stock market, following similar moves by former China hedge funds UBS Global Wealth Management and Nomura Holdings Corporation in recent weeks. This signals that excluding China is becoming a popular strategy for investors and analysts amid the country’s bleak outlook and better returns elsewhere.
Economists increasingly believe China will miss its growth target of around 5% this year—and many equity analysts are now referring their clients elsewhere.
JPMorgan strategists recommend investors use the money freed up by the China downgrade to increase exposure to markets where the U.S. bank has been overweight: India, Mexico, Saudi Arabia, Brazil and Indonesia. They also note the challenges of managing China’s high weighting in the MSCI Emerging Markets Index and the growth of EM mandates that exclude China.
New EM equity funds excluding China are springing up and have matched Annual record for new launches of 19 set last year as investors sought better returns outside the country. Meanwhile, the outperformance of India and Taiwan meant the weightings for each country were only a few percentage points apart. replace China tops EM stock portfolio.
In a separate note written by strategists including JPMorgan’s chief China and Asia equity strategist Wendy Liu, the bank cut its end-2024 baseline target for the MSCI China Index to 60 from 66 and for the CSI300 Index to 3,500 from 3,900. Those projections are still higher than the current trading levels of both indexes.
The most of Global banks now expect China’s economy to grow below 5% this year, with Bank of America Corp. the latest to cut its forecast. JPMorgan’s Haibin Zhu also cut his 2024 GDP growth forecast for China to 4.6%.
“We think the market could trade weakly in September-October following Q2 results,” Liu wrote. “During this period, the US presidential election, the Fed rate decision and the US growth outlook will be in focus.”
JPMorgan has also increased its cash exposure to Chinese stocks from 1% to 7.7%, according to a report.
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