JPMorgan downgrades Chinese stocks amid US election risks and tepid policy support

JPMorgan Chase & Co. discarded its buy recommendation for Chinese stocks, as the increase in volatility due to US elections was added onto the growth headwinds and tepid policy support.

Strategists led by Pedro Martins cut China to neutral from overweight in a note Wednesday. The risk of a renewed trade war between Washington and Beijing could hang over the shares in the run-up to November's US presidential vote, while moves by President Xi Jinping's government to help drag the country out of its economic slump continue to be "underwhelming."

“The impact of a potential ‘Tariff War 2.0’ (with tariffs increasing from 20 per cent to 60 per cent) could be more significant than the first tariff war,” the strategists wrote. “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.”

The strategists added that challenges in managing the high weight of China in the MSCI emerging-market index and growing EM ex-China mandates were institutional factors likely to weigh on stock prices.

Strategists, including JPMorgan chief Asia and China equity strategist Wendy Liu, wrote in a separate note that 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. They are still above the 55.7 and 3,252 levels at which the gauges last closed.

This comes after the vast majority of global banks now expect China's economy to grow less than 5 per cent this year. The latest to slash its forecast is Bank of America Corp. Meanwhile, JPMorgan's Haibin Zhu has also trimmed China's 2024 GDP growth forecast to 4.6 per cent.

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

JPMorgan also increased the cash level in its China equity model portfolio to 7.7 per cent from 1 per cent, a report said.