Strategists Prefer China Tech Over ‘Crowded’ U.S. Rivals
As investors seek to diversify their portfolios away from the crowded landscape of U.S. tech stocks, JPMorgan strategists are recommending a move towards emerging markets, particularly China tech. In a recent note to clients, Mislav Matejka, leading JPMorgan’s equity strategy team, pointed out that emerging market equities have significantly underperformed developed market counterparts by roughly 40% since 2021. However, they have now been upgraded to an overweight or bullish stance.
Further supporting this view, analysts from Bank of America indicated that emerging market equities are poised to lead the next bull market. This is reflected in the performance of the iShares Emerging Markets ETF, which has surged 10% this year, outperforming the S&P 500, which has only managed a 1% rise.
China Tech: The Preferred Exposure
JPMorgan’s strategists have particularly singled out China tech as their favored investment avenue. The Hang Seng Index in Hong Kong has experienced a notable rise, recording up to 16% gains this year. Despite earnings from major Chinese tech players such as Tencent (HK:700) and Alibaba (BABA) failing to generate significant investor enthusiasm, JPMorgan views the current weakness as a golden opportunity for those diversifying beyond U.S. tech.
The strategists mentioned that, while they upgraded the asset class to a neutral stance in the first quarter of 2025, they are now prepared to adopt a more aggressive approach. This optimism stems from a few key catalysts, primarily the easing of tariff war uncertainties between the U.S. and China. Though a recent resolution is unlikely to be definitive, JPMorgan’s outlook holds that the worst market headwinds may have subsided.
Factors Supporting Emerging Markets
Moreover, the relative weakness of the U.S. dollar is expected to continue through late 2025. Historically, emerging markets demonstrate an inverse correlation with the dollar, benefiting those economies reliant on commodities and facing significant dollar-denominated debt. Much of the protracted underperformance of emerging markets stocks can be linked to the dollar’s dominance.
As U.S. bond yields hover at elevated levels, concerns over tax-cut bills coinciding with rising deficits persist. However, JPMorgan posits that if tangible data aligns with the already lackluster soft data throughout the summer, the Federal Reserve may shift towards a more accommodative stance. Typically, emerging markets have fared better in environments of decreasing rates and dovish Fed policies.
Growth Expectations in China
JPMorgan recently revised its GDP projections for China upward to 4.8% for 2025, following similar revisions from Goldman Sachs. Additionally, Chinese 10-year bond yields have stabilized around approximately 1.7% over the past six weeks after a decline from nearly 3% earlier this year, suggesting that expectations for economic growth may also have leveled off, reinforcing the case for investing in stocks.
Valuation Metrics Favor Emerging Markets
Although valuations can often be unreliable indicators of market performance, JPMorgan points out that emerging markets appear attractively priced with a forward price-earnings ratio of 12 times. In comparison, developed markets are trading at 19 times earnings, underscoring the relatively modest positioning of global investors toward emerging assets.
Recommendations for Investors
The bank recommends focusing on emerging market economies that exhibit higher domestic exposures, such as India and Brazil. Furthermore, unique growth drivers in countries like Chile and Korea may present additional opportunities for investors looking to capitalize on the potential rebound of these markets.
In conclusion, increased attention to China tech and emerging markets from leading financial institutions like JPMorgan and Bank of America signals a pivotal shift in investor sentiment, one that offers not only a remedy for overexposed U.S. positions but also an invitation to explore undervalued opportunities globally.
