After years in the wilderness, emerging market equities may finally be ready to rejoin the global investment conversation.
That is the latest call from JP Morgan, which has upgraded its view on the asset class from neutral to overweight, signalling its belief that emerging markets now offer better return potential than their developed counterparts.
Emerging market (EM) equities have underperformed developed market (DM) shares by around 40% since 2021, according to JP Morgan’s equity strategy team, led by Mislav Matejka.
But the tide may be turning, supported by a mix of macroeconomic, political and valuation drivers.
Geopolitics
One key factor is geopolitics. The United States has cut proposed tariffs on Chinese imports from 145% to 41%. While trade tensions remain, JP Morgan believes the worst of the disruption may be over. That alone could help restore confidence in EM assets, particularly in Asia.
A second pillar of the case is currency. A weaker US dollar, if it materialises, would provide a boost to emerging markets.
Historically, EM stocks have traded inversely to the dollar, which affects borrowing costs, commodity prices and risk appetite. A softer dollar would ease funding pressures and support asset prices.
JP Morgan also points to interest rate dynamics. While US bond yields could rise in the short term due to inflation and fiscal policy, a dovish pivot from the Federal Reserve later this year is possible if economic indicators soften.
Emerging markets typically perform better when global interest rates are falling and liquidity is improving.
China tech recovery?
In China, the bank sees scope for recovery in the technology sector. Despite recent share price weakness and prolonged caution from investors, any improvement in consumer sentiment could trigger a rebound.
The government is gradually shifting from regulatory crackdowns to growth support, including stronger bank balance sheets and more favourable policies for the private sector.
Valuations remain attractive. Emerging markets are trading at 12.4 times forward earnings compared to 19.1 times for developed markets. Global investor exposure is still low, especially to China, offering further room for inflows.
JP Morgan is especially positive on China, India and Brazil. It has reiterated a double upgrade on the mining sector, first issued in March, and continues to avoid autos, luxury goods and energy.
For long-term investors, the signal is clear. After a prolonged stretch of underperformance, emerging markets may once again be worth a closer look.