JP Morgan Asset Management has trimmed its overall emerging markets equities position in its multi-asset portfolios, driven mostly by a “less sanguine outlook” on emerging Asia, according to Patrik Schowitz, the firm’s global multi-asset strategist.
“The Asian equity market is dominated by growth/tech names these days, while we are likely to see further rotation into value names as global economic growth accelerates and bond yields rise further,” Schowitz said in a note.
“In our global asset allocation, we are less keen on the growth/tech areas of the market, which should have less upside to earnings expectations in the near-term and are very expensive relative to value.”
Schowitz also expects the US dollar to strengthen in the near term, which is generally a headwind to emerging Asia.
In addition, China has also recovered enough for policymakers to be more conservative and worry more about containing debt and property market risks, which should be a headwind to China equities.
Meanwhile, cyclical markets in Asia, including Japan, are expected to outperform.
“Japan will likely be the major outlier in Asia and should do better than here. It’s highly cyclical, not heavy in tech, has a lot of value names and the yen might weaken a bit more.”
In terms of regions, Schowitz prefers Europe, Japan and US small-cap, while the sectors he favours are industrials, consumer cyclicals, financials, and to some extent commodities.
“The biggest risk remains a market panic about accelerating inflation leading to spiking bond yields and a risk off. We agree with central banks that the worries about inflation are overdone in the near term, despite all the stimulus. There’s plenty of slack to keep inflation down over the coming year and all we’ll see is a temporary spike. But this may not stop the market from worrying.
“The US tax and tech regulation debate could turn into a more serious headwind for global equities, although at the moment it’s probably more a relative negative for the US market rather than for the whole asset class. That’s part of the reasons why we are cautious on US large-cap equities,” he added.
