JPMorgan Chase & Co. has made the surprising move of dropping its buy recommendation for Chinese stocks. This is a significant shift, as the financial giant admits to increased uncertainty around the upcoming U.S. elections, concerns over growth, and a lack of policy support.
China’s market rating has been downgraded to neutral from overweight, according to a report by bank strategists led by Pedro Martins. The strategists cite several potential factors that may negatively affect Chinese shares. Among these are the looming possibility of a second trade war between the U.S. and China and China’s less than impressive efforts to recover from an economic slump.
What Does This Mean for China?
The strategists’ analysis suggests the consequences of a potential “Tariff War 2.0”, which could see tariffs increase from 20% to 60%, could be more damaging than the first trade war. The report states: “We expect China’s long-term growth to trend down structurally due to supply-chain relocation, the expansion of U.S.-China conflicts, and continued domestic issues.”
With this move, JPMorgan joins a growing list of global firms that are downgrading their expectations for China’s stock market. This follows similar moves by UBS Global Wealth Management and Nomura Holdings Inc. in recent weeks. The trend suggests that China’s exclusion is becoming a popular strategy for investors and analysts due to the country’s dimming prospects and the possibility of better returns elsewhere.
Where Should Investors Look Instead?
The strategists from JPMorgan propose that investors take the money saved by downgrading China and use it to increase their exposure to other markets. These include India, Mexico, Saudi Arabia, Brazil, and Indonesia. The report also highlights the challenges of managing the high weight of China in the MSCI Emerging Markets Index, as well as the growth of EM ex-China mandates.
- New EM equity funds that exclude China are emerging and have already matched the annual record of new launches set last year.
- The outperformance of India and Taiwan puts them a few percentage points away from replacing China’s top spot in EM equity portfolios.
What’s Next for China?
A separate note from strategists including JPMorgan chief Asia and China equity strategist Wendy Liu cuts the end-2024 base target for the MSCI China Index to 60 from 66, and for the CSI300 Index to 3,500 from 3,900. These predictions are still above where the two indexes are currently trading.
The vast majority of global banks now expect China’s economy to grow less than 5% this year, with Bank of America Corp. being the latest to slash its forecast. JPMorgan‘s Haibin Zhu has also cut China’s 2024 GDP growth forecast to 4.6%.
“We think the market may trade on the weak side during Sept-Oct after Q2 results,” Liu wrote. “During this time, the U.S. presidential election, the Fed’s rate decisions, and the U.S. growth outlook will be front and center.”
In conclusion, JPMorgan has also increased the cash level in its China equity model portfolio to 7.7% from 1%, according to a report.
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