Shares hurt by trade war may be bargains

Here’s a Trump bet worth considering: buy some of the emergingmarket stocks that got hammered in the first half of this year on expectations that global trade jitters will ease as the United States heads into midterm elections.

That’s the view of JPMorgan now that EM shares are down 8% in 2018, thanks to a strengthening dollar, rising US interest rates and trade tensions. The US bank, which says it’s overweight on developing nations versus developed peers, also favours emerging-market currencies, though not sovereign or corporate debt.

“EM is a relatively cheap asset class, and geopolitical influences should fall later in the fourth quarter,” said John Normand, the bank’s London-based head of cross-asset fundamental strategy. “But August probably will deliver further volatility until the US clarifies its proposal to levy tariffs on another $200 billion of Chinese imports.”

While emerging stocks in July had their first positive month since January, they’re turning negative again, fuelling a debate over whether it’s premature to return to them.

JPMorgan cites attractive valuations, earnings growth and technical indicators after the stocks underperformed developed peers by about 900 basis points this year. It also says the dollar is expected to give up some of its recent gains, providing support for emerging markets.

Another positive factor could emerge if the Federal Reserve skips one of its expected interest rate increases. JPMorgan forecasts an additional $320 billion in inflows to emerging-market equities before global funds move back to their long-term average positions.

For the immediate future, though, the bank remains selective, given recent trade-policy threats.

“Confidence on exactly when between now and November those tensions fade is low, because the president’s approval rating remains firm and he believes that his approach is delivering benefits to the US,” Mr Normand said. “Hence the recommendation is to only add selectively in EM.”

In any case, emerging markets may be headed for a period of increased volatility as the midyear lull saps liquidity and the USChina dispute leaves traders struggling to predict the yuan’s direction.

The trade standoff has already prompted BlackRock, the world’s largest asset manager, to trim its holdings of developing-economy assets.

“With uncertainty on US-China trade issues in the backdrop, EM will certainly react to any developments, either escalation or detente, from the US side,” said Maximillian Lin, a Singapore-based strategist at NatWest Markets.

The onshore yuan is the worst-performing emerging-market currency after the Turkish lira in the past month.