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Is a Trade War Looming? JP Morgan Raises Red Flags on China Stocks

Daniel Kim Views  

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According to Bloomberg, JPMorgan Chase & Co. has withdrawn its buy recommendation on Chinese stocks before the U.S. election. The decision was influenced by the volatility triggered, growth pressures, and weak policy support.

In a report released on Wednesday, JPMorgan’s lead strategist, Pedro Martins, downgraded the firm’s stance on China from “overweight” to “neutral.” The analysts cautioned that escalating tensions between Washington and Beijing and the possibility of a new tariff conflict could adversely affect Chinese equities ahead of the November U.S. presidential election. They also noted that the economic stimulus measures implemented by the Xi Jinping administration have not met expectations.

Strategists described the potential impact of a Tariff War 2.0, where tariffs could increase from 20% to 60%, as possibly being more significant than the first tariff war. They noted, “The restructuring of supply chains, escalating U.S.-China tensions, and ongoing domestic issues are likely to decrease China’s long-term growth rate structurally.”

The report also highlighted challenges in managing the allocation of Chinese stocks within model portfolios. The high weighting of Chinese equities in the MSCI Emerging Markets Index and the growing trend of emerging market mandates excluding China could exert downward pressure on stock prices.

In another report released that day, strategists, including Head of China Equity Research and China Strategist Wendy Liu, revised their end-2024 target for the MSCI China Index from 66 to 60 and the CSI300 Index from 3,900 to 3,500. These targets remain above the last closing prices of 55.7 and 3,252, respectively.

This adjustment follows the expectations of most global banks that China’s economic growth rate will fall below 5% this year. Bank of America also recently revised this outlook downward. Haibin Zhu of JPMorgan lowered his forecast for China’s GDP growth in 2024 to 4.6%.

Liu pointed out that the market might experience weakness from September to October following the second-quarter earnings announcements. She analyzed that during this period, the U.S. presidential election, Federal Reserve interest rate decisions, and the outlook for U.S. growth will be in the spotlight.

Meanwhile, JPMorgan has increased the cash allocation in its China stock model portfolio from 1% to 7.7%.

Daniel Kim
content@viewusglobal.com

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