JPMorgan ditches China buy recommendation due to ‘Tariff War 2.0’

China was downgraded to neutral from overweight in the bank’s emerging markets allocation, strategists led by Pedro Martins wrote in a note Wednesday. The potential for another trade war between Washington and Beijing could weigh on shares, while China’s moves to lift itself out of its economic slump remain “underwhelming,” they said.

“The impact of a potential ‘Tariff War 2.0’ (with tariffs increasing from 20% to 60%) could be more significant than the first tariff war,” the analysts wrote. “We expect China’s long-term growth to trend down structurally due to supply-chain relocation, the expansion of U.S.-China conflicts, and continued domestic issues,” they added.

JPMorgan joins a growing chorus of global firms downgrading their expectations for China’s stock market, following similar moves by former China bulls UBS Global Wealth Management and Nomura Holdings Inc. in the last few weeks. It signals exclusion of China is becoming a popular strategy for investors and analysts amid the country’s dimming prospects and the likelihood of better returns elsewhere.

Economists increasingly think China will miss its growth target of around 5% this year—and many equity analysts are now pointing their clients elsewhere.

The JPMorgan strategists suggested investors use the money freed up by downgrading China to raise exposure to the markets the U.S. bank is already overweight on: India, Mexico, Saudi Arabia, Brazil, and Indonesia. They also noted challenges in managing the high weight of China in the MSCI Emerging Markets Index, and the growth of EM ex-China mandates.

New EM equity funds that exclude China are sprouting up, and have already matched the annual record of new launches of 19 set last year as investors seek better returns outside of the country. Meanwhile, the outperformance of India and Taiwan puts the weight for each of them only a few percentage points away in replacing China’s top spot in EM equity portfolios.

In a separate note written by strategists including JPMorgan chief Asia and China equity strategist Wendy Liu, the bank cut its end-2024 base target for the MSCI China Index to 60 from 66, and for the CSI300 Index to 3,500 from 3,900. Those predictions are still above where the two indexes are currently trading. 

The vast majority of global banks now expect China’s economy to grow less than 5% this year, with Bank of America Corp. the latest to slash its forecast. JPMorgan’s Haibin Zhu has also cut China’s 2024 GDP growth forecast to 4.6%.

“We think the market may trade on the weak side during Sept-Oct after Q2 results,” Liu wrote. “During this time, the U.S. presidential election, the Fed’s rate decisions, and the U.S. growth outlook will be front and center.”

JPMorgan also raised the cash level in its China equity model portfolio to 7.7% from 1%, according to a report.