The Sky Is Blue for Emerging-Market Stocks, JPMorgan Says

(Bloomberg) -- With the chances growing that the U.S. and China will resolve their trade dispute and the dollar likely to weaken as the Federal Reserve stays on hold, the outlook for emerging-markets stocks is looking rosier.

That’s the conclusion that JPMorgan Asset Management reached in a report published this month, adding that emerging markets are still in mid-cycle, despite a slowing economic momentum globally. Another point in their favor: valuations have become “quite attractive” after last year’s rout.

“We anticipate that China will do everything it can to resolve trade tensions with the U.S., ” wrote Richard Titherington, JPMorgan Asset’s chief investment officer for emerging-market and Asia Pacific equities, saying that dwindling capex, consumer confidence and retail spending have given Beijing a much more stronger incentive to do so. “If that happens, it will be positive for emerging-market and Asia Pacific equities. If it doesn’t, we expect China will move decisively to stimulate its domestic economy.”

Read more: Small Difference of Opinion May Herald Big Gains for EM Stocks

The world’s second-largest economy will likely make concessions on opening up market access for autos and financial services, as well as lowering import tariffs on vehicles and consumer products, and increasing buying of oil, LNG and agriculture products, he said. He sees the nation holding the line on sectors including software and health care, though a resolution could be stymied if the U.S. “negotiates very aggressively” on sensitive issues such as intellectual property.

Titherington notes that fundamentals have improved, and that “it’s difficult to see EM earnings performance getting much worse in 2019” unless there’s a global recession, which JPMorgan Asset doesn’t foresee in the near term.

So far this year, emerging markets have been a “bright spot” for equity and bond inflows, BlackRock Inc.’s head of iShares EMEA investment strategy Wei Li said on Bloomberg TV Monday. Both the U.S. and China want a trade deal, and that would bring relief to the assets, including those in China, she said.

With the MSCI Emerging Markets Index trading at 1.6 times book value, up from a low of 1.4 times in October, JPMorgan Asset’s Titherington says long-term investors should consider adding to their exposure, especially if there’s further weakness. The firm estimates an aggregate five-year return of 14 percent for the gauge -- close to a previous peak.

--With assistance from Ben Bartenstein and Nejra Cehic.

To contact the reporter on this story: Natalie Lung in Hong Kong at flung6@bloomberg.net

To contact the editors responsible for this story: Divya Balji at dbalji1@bloomberg.net, Cecile Vannucci

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