JPMorgan Says Buy Emerging Stocks That Were Hammered by Trade Clash

Here’s a Trump bet worth considering: Buy some of the emerging-market stocks that got hammered in the first half on expectations global trade jitters will ease as the U.S. heads into midterm elections.

That’s the view in a JPMorgan report, after the asset class slumped almost 8 percent in 2018, dragged down by a strengthening dollar, rising U.S. interest rates and above all, concern about a trade war. JPMorgan, which says it’s overweight developing nations versus developed peers, also favors emerging-market currencies, though not sovereign or corporate debt.

“EM is a relatively cheap asset class and geopolitical influences should fall later in the fourth quarter,” John Normand, the London-based head of cross-asset fundamental strategy at the U.S. bank, said after the report was released. “But August probably delivers further volatility until the U.S. clarifies its proposal to levy tariffs on another $200 billion of Chinese exports to the U.S.”

While emerging stocks marked their first positive month since January in July, they’re turning negative so far this month, fueling a debate on whether it’s premature to return to the asset class. JPMorgan cites attractive valuations, earnings growth and technical indicators after the stocks underperformed developed peers by about 900 basis points this year. The bank also says the dollar is expected to give up some of its recent gains, providing support for emerging markets just as China eases.

Another positive could come if the Federal Reserve skips one of its upcoming quarterly interest rate hikes. JPMorgan forecasts an additional $320 billion of inflows into emerging-market equities before global mutual funds move back to their long-term average positions.

For the immediate future though, JPMorgan remains selective, given recent trade-policy threats.

“Confidence on exactly when between now and November those tensions fade is low, because the President’s approval rating remains firm and he believes that his approach is delivering benefits to the U.S.,” Normand said. “Hence the recommendation to only add selectively in EM."

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