JPMorgan expects a slowdown in U.S. growth and an easing of monetary policy in the second half of 2024. According to the bank’s strategists, these conditions should bode well for emerging market (EM) equities “as growth and interest rate differentials have been significant drivers of relative performance.”
“The repricing of U.S. rates and growth outlook should make EM equities more appreciated on the global asset allocation chessboard, given their strong positive optionalities,” strategists at JPMorgan said in a note.
Potential risks to this view include significant growth scares or financial disruptions, strategists cautioned, which they do not consider part of their base case. Furthermore, the upcoming U.S. elections could pose challenges for EM equities, as discussions around trade, tariffs, and risk premia may become more complex and hinder potential upside.
Overall, JPMorgan’s team believes that diminishing U.S. exceptionalism is likely to increase the global appeal of EM equities.
They highlight several key factors driving this trend. The EM GDP growth premium over developed markets (DM) is projected to increase to 2.7% in 2024, up from 2.5% in 2023, supported by improving macroeconomic conditions in EM.
At the same time, faster and deeper rate cuts by the Federal Reserve could allow for greater easing in EM where necessary. Other factors such as low investor positioning, attractive valuations, diversification away from U.S. equities, and a weaker U.S. dollar could also make a positive impact.
"A ‘bending but not breaking’ U.S. economy is ideal for EM equities as historically they have moved in the same direction,” strategists highlighted.
Historically, during Fed easing cycles, EM equities have slightly outperformed relative to DM and U.S. equities, with EM equities declining by 11% on average compared to a 15% decline in DM and a 13% decline in U.S. equities.