JPMorgan Chase & Co. has withdrawn its buy rating on Chinese stocks, citing increased volatility related to the upcoming U.S. elections, as well as growth issues and weak political support.
China was downgraded to neutral from overweight in the bank’s emerging markets allocation, strategists led by Pedro Martins wrote in a note on Wednesday. The potential of another trade war between Washington and Beijing could weigh on stocks, while China’s efforts to emerge from its economic slump remained “disappointing,” they said.
“The impact of a potential ‘Tariff War 2.0’ (with tariffs rising from 20% to 60%) could be more severe than that of the first tariff war,” the analysts wrote. “We expect China’s long-term growth to structurally slow due to shifting supply chains, escalating U.S.-China conflicts, and ongoing domestic political issues,” they added.
JPMorgan joins a growing chorus of global companies revising their expectations for the Chinese stock market downward after former China bulls UBS Global Wealth Management and Nomura Holdings Inc. in recent weeks. It suggests that excluding China is becoming a popular strategy for investors and analysts, given the country’s bleak outlook and the likelihood of better returns elsewhere.
There are growing fears among economists that China will miss its growth target of around 5% this year – and many stock analysts are now referring their clients to other markets.
JPMorgan strategists suggested that investors should use the money freed up by China’s downgrade to increase their exposure to markets where the U.S. bank is already overweight: India, Mexico, Saudi Arabia, Brazil and Indonesia. They also pointed out that it would be difficult to manage China’s high weight in the MSCI Emerging Markets Index and the growth of EM mandates without China.
New EM equity funds without China are springing up and have already reached the same level as Annual record for new launches of 19 set last year as investors look for better returns outside the country. Meanwhile, the outperformance of India and Taiwan is only a few percentage points away from the two countries’ weightings. Substitute China’s top spot in EM equity portfolios.
In a separate note from strategists including Wendy Liu, chief Asia and China equity strategist at JPMorgan, the bank lowered its end-2024 base target for the MSCI China Index to 60 from 66 and for the CSI300 Index to 3,500 from 3,900. These forecasts are still above the current price of the two indices.
The vast majority of global banks now expect China’s economy to grow by less than 5% this year. Bank of America Corp. recently significantly lowered its forecast. Haibin Zhu of JPMorgan also lowered his GDP growth forecast for China in 2024 to 4.6%.
“We think the market may be rather weak in September and October after the second quarter results,” Liu wrote. “During this period, the US presidential election, the Fed’s interest rate decisions and the US growth outlook will be in focus.”
According to a report, JPMorgan also increased the cash holdings in its model portfolio for China equities from 1% to 7.7%.
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