Investing.com — Emerging market (EM) equities are poised for a significant rally in the second half of the year, driven by attractive valuations, a projected reversal in hawkish central bank policies, and economic signs of recovery in China, according to a research note released by JPMorgan.
The investment bank maintained its overweight stance on EM relative to developed markets (DM), a tactical shift it initiated last year following an extended bearish cycle that had persisted since 2008.
A primary catalyst for the continued bullish outlook is the expansion of the artificial intelligence trade.
JPMorgan equity strategists, led by Mislav Matejka, noted that while megacap technology firms in developed markets previously rallied on strong earnings, emerging market AI plays offer even cheaper valuations with substantial upside potential.
Within the semiconductor space, the aggressive rally in memory chips remains supported by fundamentals.
Meaningful supply additions are not anticipated until the second half of next year. Because equities typically discount supply-demand imbalances six to nine months ahead, the bank indicated it is premature to turn bearish on the sector.
The macroeconomic backdrop is also expected to shift in favor of developing economies. Market pricing of central bank hawkishness, which spiked following the outbreak of the Iran war, is projected to reverse in the second half of the year.
Additionally, the U.S. dollar, which served as a safe haven over the past two months, is currently trading at a long-term valuation premium of 10% to 15%. A softening greenback has historically acted as a tailwind for EM assets.
Geopolitical and regional factors further support the bank’s thesis.
JPMorgan observed increasing evidence of economic “green shoots” in China, an inflection point higher that could be further aided by the upcoming summit between U.S. President Donald Trump and Chinese President Xi Jinping.
On the broader geopolitical front, the bank reiterated its stance that dips driven by conflict-related uncertainty should be treated as buying opportunities.
Currently, the valuation gap between the two regions is at historic extremes, with the EM price-to-earnings (P/E) ratio trading at record cheap levels relative to DM.
At an absolute 12x forward P/E, JPMorgan described the asset class as far from demanding, particularly as institutional investor positioning remains low and capital inflows begin to accelerate.
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