Why JPMorgan Is Overweight On Emerging Markets But Not India
JPMorgan isn’t overweight on India because of high valuations and over-ownership by foreign investors, James Sullivan says.
WATCH | JP Morgan’s James Sullivan sees India slowdown bottoming out
The earnings strength that drove a significant amount of equity market performance last year is expected to continue in 2020, according to JPMorgan & Chase Co.’s James Sullivan.
“We are currently seeing 78-80 percent of S&P companies beat earnings expectations. That’s one of the highest levels that we had seen over the course of the last 30 years,” the head of equity research (Asia, ex-Japan), at the global investment banking firm said. “We think that will continue to provide a bid for equity markets.”
Sullivan also expects the shift from momentum into value stocks that started in the fourth quarter of calendar year 2019 to continue. That, according to him, forms the crux of JPMorgan’s equity strategy for the new year.
“As per a JPMorgan analysis, that shift is only about 40 percent done, which is very positive, particularly for emerging market equities,” he told BloombergQuint in an interview. “Therefore, we are overweight on emerging market equities over developed markets.”
The emerging market performance is driven by the growth differential relative to the U.S. and other developed markets, Sullivan said, adding that the growth gap has started narrowing since the second half of last year.
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“The economic data of countries like China has started troughing out and there are incremental signs of demand. For India, if we focus on the year-on-year GDP trends one will land up missing the trough, but the quarter-on-quarter data shows signs of bottoming out of the Indian economy and that bodes well for the positive inflection in terms of growth differential relative to the U.S. and other developed markets,” he said. “Historically, as emerging markets grow faster than the developed markets that triggers larger flows into these markets.”
Still, JPMorgan isn’t overweight on India. That’s because of its high valuations and over-ownership by foreign investors. “If you put that positioning and valuation together then it is difficult to see a sustained and aggressive outperformance of the Indian markets.”
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That said, Sullivan sees a significant opportunity for stock-picking. He prefers the financial sector on the back of incremental changes in legislation like the bankruptcy law, the ability of companies to work on their debt expeditiously. Sullivan is also positive on utilities and materials but remains cautious on the telecom space.