JPMorgan’s Bullish Case: Five Reasons to Consider Emerging Markets Now Executive Summary

• JPMorgan’s Point: For the last decade, EM stocks have performed terribly compared to DM stocks, lagging by over 200% since 2010. Because of this, global investors have low exposure (“positioning remains light”), especially to China.

• Why It Matters: This is a classic “reversion to the mean” argument. Assets that have underperformed for an extended period can be primed for a powerful rally as sentiment shifts and investors reallocate capital to the neglected area. The fact that few investors are currently invested means there is a large pool of potential buyers who could drive prices higher.

2. A Weaker U.S. Dollar

• JPMorgan’s Point: While short-term bounces are possible, the bank expects the U.S. dollar (USD) to weaken over the long term.

• Why It Matters: A weaker USD is a significant tailwind for emerging markets for two main reasons:

  • Debt Relief: Many EM governments and companies borrow in USD. When the dollar weakens, their existing debt becomes cheaper to repay in their local currency.

  • Increased Investment: A weaker dollar makes EM assets (stocks, bonds) cheaper for foreign investors holding other currencies, increasing their attractiveness and driving capital inflows.

3. Supportive Monetary Policy (A “Dovish” Fed)

• JPMorgan’s Point: The U.S. Federal Reserve is expected to become more “dovish” (i.e., more likely to cut interest rates). Furthermore, the vast majority of EM central banks (19 out of 21 tracked by JPMorgan) are also expected to cut rates.

• Why It Matters: Lower interest rates stimulate economic activity by making it cheaper for businesses and consumers to borrow money for investment and spending. Coordinated rate cuts across the globe can create a powerful, supportive environment for corporate earnings and stock market performance.

4. China: Negativity is “Priced In”

• JPMorgan’s Point: The market is well aware of China’s economic challenges (property sector, slowing growth). This negative sentiment is already reflected in low stock prices. Now, the Chinese government is actively shifting its policy to support the private sector.

• Why It Matters: When market expectations are very low, it doesn’t take much good news to spark a rally. The argument is that the risk/reward for Chinese stocks has become favorable because the downside is already accounted for, while any positive policy surprises could lead to significant upside.

5. Attractive Valuations

• JPMorgan’s Point: EM stocks are significantly cheaper than their DM counterparts, trading at a forward Price-to-Earnings (P/E) ratio of 13x versus 20x for DM.

• Why It Matters: A lower P/E ratio suggests that you are paying less for every dollar of a company’s future earnings. This “valuation discount” provides a potential margin of safety and implies that EM stocks have more room to grow in value compared to more expensive markets.

Potential Risks and Counterarguments

While JPMorgan presents a strong bull case, investors should also consider the risks:

• China’s Economic Reality: The bet on China relies on government stimulus being effective. If the underlying issues in its property market and weak consumer confidence persist, the economy could continue to struggle despite policy efforts.

• A Stronger-for-Longer Dollar: If U.S. inflation remains stubborn and the economy stays resilient, the Fed may not cut rates as expected. This could keep the dollar strong, maintaining pressure on EM assets.

• Geopolitical Tensions: Emerging markets, particularly China, are sensitive to geopolitical risks, including trade disputes and regional conflicts. An escalation could quickly sour investor sentiment.

• A “Value Trap”: EM stocks could be cheap for a reason. Slower global growth or structural issues within these economies could mean they are a “value trap”—stocks that appear cheap but remain so because of poor fundamentals.

Conclusion

JPMorgan’s analysis paints a compelling picture of an asset class at a potential turning point. The combination of cheap valuations, low investor positioning, and multiple potential catalysts (weaker USD, rate cuts, China stimulus) forms a classic bull thesis.

For an investor, this could mean considering an allocation to emerging markets through broad ETFs (like EEM or VWO) or focusing on the specific countries JPMorgan highlights, such as China (MCHI), India (INDA), Korea (EWY), and Brazil (EWZ). However, this potential for higher reward comes with higher risk, and the outcome heavily depends on the macroeconomic factors playing out as JPMorgan predicts.