Emerging markets have surged. Why JPMorgan says it's too early to buy for the long term.

By Jamie Chisholm

A Trump win would pressure emerging-markets equities, says JPMorgan

It's the last day of what so far has turned out to be a positive September for Wall Street, with the S&P 500 up 1.6% for the month to date.

Indeed, there's been a renewed burst of optimism across many parts of the global marketplace following the announcement over the past several days of China's substantial stimulus proposals.

Emerging markets in particular have had a good run - the iShares MSCI Emerging Markets ETF EEM is up 7.5% this month - with sentiment also given a lift by the Federal Reserve's 50 basis point interest rate cut on Sept. 18.

However, a team of equity strategists at JPMorgan, led by Mislav Matejka, says its best to wait until after the U.S. election before committing to emerging markets for the longer term.

First, some context. Emerging-market equities remain "undemanding and underowned," says JPMorgan, with the the MSCI emerging index's 12-month forward price-to-earnings ratio relative to developed markets near its lowest in nearly 20 years.

Before Monday's action the MSCI emerging index was still lagging the MSCI developed index by 3% on the year, even with the latest EM outperformance of some 7% in the past few weeks. Indeed, since Jan. 2021 the MSCI emerging index has underperformed the developed market by 30%.

Furthermore, history shows that the Fed cutting borrowing costs has normally benefitted emerging assets, particularly so if the easing occurs without a sharp U.S. economic slowdown and the dollar weakens.

So, all of that suggests a significant turning point for emerging markets equities may have occurred.

Yet, the JPMorgan team suggests the latest emerging-markts rally should be faded, primarily because of "event risk in November."

They note that with the 2024 U.S. election too close to call investors should be wary of what happened in 2016 when emerging markets equities fell 10% in pretty short order relative to developed stocks following the Trump victory.

"The risk at present is the prospect of a 60% tariff on all Chinese imports, along with the inflationary impact from tariffs on other countries, as well as the potentially stronger USD DXY, which could all lead to the selling of EM assets in the event of Trump winning the upcoming election," says JPMorgan.

In contrast, emerging-markets equities gained 8% in the months after President Biden won the 2020 election, notes JPMorgan. The problem is no one can make a bet on either of those outcomes with much degree of certainty. And with emerging markets sporting relative strength indices that are "near-term overbought," according to JPMorgan, it's best to wait for the election dust to clear.

"Put together, we look to fade the latest bounce...and keep neutral stance on EM vs DM equities in our global equity allocation, for now. In November, as the U.S. elections event risk moves behind us, there could be an opportunity to upgrade EM," JPMorgan concludes.

Markets

U.S. stock-index futures (ES00) (YM00) (NQ00) are a fraction lower as benchmark Treasury yields BX:TMUBMUSD10Y rise. The dollar index DXY is down, while oil prices (CL.1) fall and gold (GC00) is trading around $2,650 an ounce.

   Key asset performance                                                Last       5d      1m      YTD     1y 
   S&P 500                                                              5738.17    0.09%   3.78%   20.30%  35.67% 
   Nasdaq Composite                                                     18,119.59  0.95%   2.29%   20.71%  37.07% 
   10-year Treasury                                                     3.78       2.90    -12.80  -10.09  -90.70 
   Gold                                                                 2672.3     0.71%   5.38%   28.98%  44.91% 
   Oil                                                                  68.23      -3.53%  -7.36%  -4.35%  -23.01% 
   Data: MarketWatch. Treasury yields change expressed in basis points 

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The buzz

U.S. economic data due on Monday includes the Chicago Business Barometer (PMI) for September at 9:45 a.m. Eastern.

Federal Reserve Governor Michelle Bowman speaks on policy and the economic outlook at 8:50 a.m. Fed Chair Jerome Powell makes comments at a National Association for Business Economics event in the afternoon.

Shares of Chrysler and Jeep maker Stellantis (IT:STLAM) (STLA) are down more than 12%, dragging other auto stocks lower, after issuing a large downgrade to its financial guidance.

Shares in London-listed Aston Martin Lagonda (UK:AML) plunged 25% on a profit warning.

Japan's Nikkei 225 JP:NIK fell 4.8% as investors got the first chance to react to news that the more monetary-hawkish Shigeru Ishiba will be the new prime minister. Ishiba on Monday called an election for Oct. 27.

Carnival Corp. (CCL) will release earnings before the market open.

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The chart

China's CSI 300 XX:000300, an index of the biggest mainland A-shares traded in Shanghai and Shenzhen, has jumped a remarkable 17.3% in the last eight sessions as investors latched on to the big stimulus efforts announced by Beijing. However, the huge rally has left the CSI 300 going into the Golden Week holiday with a 14-day relative strength index of 89, which is well above the 70 threshold that indicates a security is overbought.

Top tickers

Here were the most active stock-market tickers on MarketWatch as of 6 a.m. Eastern.

   Ticker  Security name 
   NVDA    Nvidia 
   TSLA    Tesla 
   NIO     NIO 
   GME     GameStop 
   BABA    Alibaba 
   HOLO    MicroCloud Hologram 
   TSM     Taiwan Semiconductor Manufacturing 
   AAPL    Apple 
   DJT     Trump Media & Technology 
   PLTR    Palantir 

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-Jamie Chisholm

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09-30-24 0646ET

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