JPMorgan Joins Banks Warning of More Trade Pain for EM Investors

(Bloomberg) -- JPMorgan Chase & Co. has joined the chorus of Wall Street banks warning emerging-market investors not to underestimate growing global protectionism.

Trade wars are morphing from a tail risk to the base case, Luis Oganes and Jonny Goulden, strategists at the New York lender, said in a note.

“The U.S.-China conflict has disturbingly shifted to the more worrisome scenario,” they said. “Collateral damage to EM from a U.S.-China trade war could be significant.”

Morgan Stanley and Goldman Sachs Group Inc. are similarly bearish. Yet, many investors think the threat of developing-nation assets being hit by trade spats is overblown. JPMorgan’s own asset management arm said Monday that many markets were now oversold and valuations “very reasonable.”

As far as JPMorgan, the bank, is concerned, traders are more worried about a rising dollar and U.S. short-term yields than trade tensions. Their nonchalance about the latter could prove misplaced, according to Oganes and Goulden.

“It looks like EM assets have just been following the tightening liquidity environment, without necessarily having priced in too much of a downbeat view of growth due to trade tensions,” they said. “That means that there can be further downside for the EM asset class should trade tensions intensify, causing downward growth revisions.”

JPMorgan maintains Asia would be hit particularly hard if that scenario plays out, and has added a short renminbi position to its model portfolio. It’s also gone underweight the South African rand, saying it’s the most exposed to China among its peers in Europe, the Middle East and Africa.

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