India Unlikely To Join The Upcoming Emerging-Market Rally, JPMorgan Says

Emerging market equities are expected to see a “strong rebound” in the second half of this year, according to JPMorgan. But India is not among its favourites.

A historical analysis suggests that average emerging market equity returns are the strongest when global manufacturing PMI is below average but is turning positive, the investment firm said in a report. That so-called inflection point might be seen in the coming months, it said.

“We are bound to see sharp bounce in PMIs in May (already seen) and June (expected), as lockdowns have begun to be relaxed in the last weeks in key countries,” the report said.

According to JPMorgan, that’s likely to mostly benefit:

• Indonesia, South Korea, Russia, Brazil, Peru and Taiwan.
• Information technology, consumer discretionary, materials and energy.
• Emerging market value over growth; and small caps over large caps

Equities across the globe witnessed the worst plunge in more than a decade after the coronavirus outbreak forced the nations to seal their borders, freezing economic activity. Benchmarks pared some of their losses after large economies started to announce stimulus.

The stabilisation in emerging market currencies, according to JP Morgan, is usually supportive for the relative outperformance of emerging over developed markets. This differential is likely to widen again and should help the relative earnings trends, it said.

There’s a short-term case for emerging markets to shift into value stocks. That’s because:

• Value is unloved and discounted, trading at a 53% discount to growth versus 30% historical average.
• Value tends to beat growth when emerging market is moving higher.
• Overweight value across asset allocation, global equities and quantitative equity research calls.

Nikolaos Panigirtzoglou, managing director-global market strategy at JPMorgan, expects the developed economies to follow a China-like steady normalisation and a V-shaped recovery. This has shifted investor focus to traditional cyclical stocks such as consumer discretionary, banks, industrials and commodity sectors, the report said.

Among the global investment firm’s emerging portfolio, the overweight- and neutral-rated countries and sectors trading below their 10-year average are:

• Indonesia is the only overweight country that trades at a significant discount; India does not find mention here.
• Overweight-rated country sectors are trading below versus their own histories; this includes the financial space in India.
• Two Indian stocks on this list of inexpensive names are State Bank of India and UPL Ltd. compared to 21 from China, four from Korea and three from Brazil.

Emerging markets will rally but, according to JP Morgan, India may not be an active participant. While the investment bank is not negative on India, the country doesn’t feature among its favourites based on rebound in PMI and valuations.

There’s a note of caution.

JP Morgan cautions against value buying due to its relative ineffectiveness against growth buying over the past 20 years. Also, these trends work out well over the medium term and not necessarily over the very short term.

“While the value versus growth performance tends to follow longer periods of emerging market rallies, it is statistically irrelevant during shorter periods—a good barometer but not a good thermometer,” JP Morgan said.