A win in November’s presidential election from Republican candidate Donald Trump could throw a wrench in the Chinese stock market’s explosive recent performance, cautioned JPMorgan Chase strategists in a Monday note to clients, dousing seemingly unfettered optimism surrounding the world’s second-largest equity market.
Chinse stocks are red hot.
“We look to fade this rebound for now,” wrote a group led by Mislav Matejka, the bank’s head of global and European equity strategy, referring broadly to emerging market stocks after the MSCI emerging markets index’s 6% gain in September, led primarily by the surge from China, by far its largest country by weight.
The JPMorgan strategists said they are “unexcited about the China economy” despite the recent fervor, but it’s not just fundamentals driving the lukewarm tune for emerging markets.
If Trump prevails in November, the bank expects emerging market stocks “will be a laggard, at least initially,” referencing the group’s 10% underperformance compared to developed market stocks in the two months following the 2016 election.
The Trump risk for emerging market stocks, tied to his hawkish trade policies especially toward China, may be a headwind, but after the U.S. election passes, JPMorgan said they’d consider upgrading the group, noting emerging market stocks could be at a “turning point” as they recover following 30% underperformance compared to developed market equities since Jan. 2021.
27%. That’s how much the Chinese stock index CSI 300 is up over the last two weeks.
Chinese stocks’ massive rally raged on Monday, as the CSI 300’s 8.5% gain was its best day since Sept. 2008, according to FactSet data. After falling to a five-year low earlier this month, the Chinese stock resurgence came as Beijing rolled out a variety of stimulatory measures designed to jumpstart its economy and stock market, such as interest rate cuts and stock buyback incentive programs. The JPMorgan note reflects a common view that the major rebound may not have the required foundation; Bank of America’s lead China equity strategist wrote Friday “the Investors we spoke to generally have low conviction in the sustainability of the rally.” Trump has floated a 50% tariff on U.S. imports on Chinese goods. China accounted for about a quarter of the MSCI emerging markets index at the end of last month and is by far the largest economy considered an emerging market, with the U.S., Japan, Australia and the United Kingdom among those considered developed markets (you may be familiar with the terms from your 401K account elections).
David Tepper, the billionaire investor considered one of the best hedge fund managers in history, is among those all in on Chinese stocks, telling CNBC last Thursday he’s buying “everything” he can tied to Chinese equities.