JPMorgan Downgrades China to Neutral

Analysts at JPMorgan have downgraded their rating of China to “Neutral” from “Overweight”, citing a “challenging outlook” within its coverage of equities in emerging markets and Asia excluding Japan.

In a client note dated Wednesday, the analysts highlighted that the equity risk premium, which measures additional returns investors require for taking on risk, is “difficult to model” for China due to global geopolitical tensions and domestic policies.

They stated, “Geopolitics will be a relevant risk factor in late 2024, and China equities could see heightened volatility around the upcoming US elections.” The potential re-escalation in trade tensions with Washington may lead to a significant increase in tariffs, expected to rise from “20% to 60%”.

China faces growth headwinds such as sluggish domestic consumption, weak private business sentiment, a prolonged housing market correction, and ongoing deflationary pressures affecting nominal growth.

The analysts noted, “We expect China’s long-term growth to trend down structurally due to supply chain relocation, the expansion of US-China conflicts, and continued domestic issues.”

They recommend that investors adopt a “barbell strategy,” which involves equal investments in both low- and high-risk securities, favoring utilities and other high yielders.