Investing.com – Emerging market stocks have underperformed for a fourth straight year, bringing the cumulative lag to their developed market peers since 2019 to 45%, according to analysts at JPMorgan.
They added that the MSCI Emerging Markets index, which tracks large- and mid-cap names across 24 countries, has reversed all of its jump logged in September sparked by a raft of stimulus measures from the Chinese government aimed at reviving sluggish activity in the world’s second-largest economy.
As a result, emerging market equities are “staying cheap” on most valuation, and are “under-owned”, the analysts said in a note to clients.
Still, possible upside for these stocks could come from news that US President-elect Donald Trump’s plans for sweeping new import tariffs are more benign than previously thought, the analysts argued. The unveiling of more aggressive stimulus moves from Beijing may add further support, they said.
While they acknowledged the potential for a squeeze higher in these stocks if either of these two events come to pass, they flagged that they do not believe this is not a moment to “close your eyes and buy” emerging market stocks “regardless of what news comes in.”
Uncertainty surrounds Trump’s trade plans in particular, with the former and future president have threatened to slap levies on allies and adversaries alike — include tariffs of 10% to 60% on goods from China, the world’s biggest emerging market.
They predicted that Trump will likely focus on executive actions when he returns to the White House later this month, and home in on issues like trade, geopolitics and immigration rather than his domestic agenda. Trump, they added, might also be “more to inclined to start forcefully” and potential dial back his actions later “in case of concessions, rather than the other way around.”
Meanwhile, they flagged that hopes for additional Chinese stimulus are “unlikely” before there is more clarity around Trump’s tariffs, noting that China may want to retain policy options to counter any adverse impact from the duties.
As a result, the analysts said are maintaining an “underweight” position on emerging market stocks.
“We have been advising through [the fourth quarter] to fade the [emerging market] bounce, and stay [underweight] [emerging market versus developed market] equities for the time being,” the analysts wrote. “Fading” refers to an investment strategy that goes against prevailing market trends.
