End of US dollar bull market could benefit emerging market stocks, JP Morgan says
The long-term outlook for emerging market stocks might be turning up, JP Morgan said, leading its strategists to reiterate their ‘overweight’ stance on that segment of the market.
Key to its call, first made earlier in the year, was the belief that the US central bank would struggle to tighten policy – if at all – and that the US dollar was peaking.
Indeed, “the fact that EM FX is near 1-year highs, and the trade-weighted USD is failing to move up, is encouraging,” the broker’s strategists led by Mislav Matejka said in a research report sent to clients.
“The dollar might be ending the bull market it enjoyed for the past few years,” Matejka said, with commodities potentially bottoming out alongside it.
Furthermore, the differential in growth rates between emerging and developed markets – typically the “key” driver of relative performance between the two groups of stocks - was “turning up”, Matejka said.
Valuation was another factor cited by the strategists.
At 30% emerging market stocks were changing hands at their steepest discount versus DM on a price-to-book basis since 2002; since China emerged as a relevant force on the world stage, that is, the broker said.
EM equities had outperformed DM by 1,100 basis points thus far in 2016, but that had to be seen in the context of losses which were still running at roughly 40% since 2011.
The strategy team also referenced research from the broker’s EM strategist, Adrian Mowat, pointing out that he was overweight Brazil, China and Indonesia and had taken profits on Russia (rated at overweight) last week and reduced India to ‘neutral’.