JPMorgan Chase & Co. has decided to withdraw its buy recommendation for Chinese stocks, citing increased volatility around the upcoming US elections, as well as growth challenges and limited policy support.
China has been downgraded from overweight to neutral in the bank’s emerging markets allocation, according to a note from strategists led by Pedro Martins on Wednesday. Concerns about another trade war between the US and China could impact share prices, while China’s efforts to recover from its economic downturn are seen as falling short, they noted.
“The potential impact of a potential ‘Tariff War 2.0’ could be more significant than the initial tariff war,” the analysts stated. “We anticipate a structural decline in China’s long-term growth due to supply chain adjustments, escalating US-China tensions, and ongoing domestic challenges.”
JPMorgan is joining other global firms in revising their outlook for China’s stock market, following similar moves by UBS Global Wealth Management and Nomura Holdings Inc. This shift reflects a growing trend among investors and analysts to exclude China from their strategies due to the country’s diminishing prospects and the potential for better returns elsewhere.
Many economists now believe that China will miss its growth target of approximately 5% this year, leading equity analysts to steer clients towards other markets.
The JPMorgan strategists recommended reallocating funds freed up from downgrading China to markets where the bank is currently overweight, such as India, Mexico, Saudi Arabia, Brazil, and Indonesia. They also highlighted the challenges of managing the high weighting of China in the MSCI Emerging Markets Index.
New EM equity funds that exclude China are gaining popularity, with performance from India and Taiwan close to surpassing China in EM equity portfolios.
In a separate note, JPMorgan revised its end-2024 base target for the MSCI China Index and the CSI300 Index downwards, while still remaining above current trading levels.
Most global banks are now forecasting China’s economy to grow less than 5% this year, with Bank of America Corp. among the latest to lower its projections. JPMorgan’s Haibin Zhu has also reduced China’s 2024 GDP growth forecast to 4.6%.
“We anticipate a weak market performance during Sept-Oct after Q2 results,” wrote JPMorgan strategist Wendy Liu. “Factors such as the US presidential election, Fed rate decisions, and US growth prospects will be key during this period.”
JPMorgan also increased the cash level in its China equity model portfolio to 7.7% from 1%, according to reports.
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