JP Morgan strategists have lowered their outlook on emerging market currencies to ‘market weight’ from ‘overweight’, citing overbought conditions after a year of strong gains. The U.S. investment bank, whose views are closely monitored by traders, also reduced its rating on the South African rand from ‘overweight’ to ‘market weight’. This follows earlier risk reductions in Central and Eastern Europe, as well as adjustments to the bank’s view on the Mexican peso in recent weeks. JP Morgan is a global financial services firm that provides investment banking, asset management, and other financial services. It serves corporations, governments, institutions, and individuals.
“There are times to reduce risk in the short term due to overcrowding and this is one of those times in our view,” JP Morgan’s strategists said in a note to clients. International investors showed renewed interest in emerging market assets last year, drawn by attractive interest rates and relatively low asset prices, further boosted by a near 10% drop in the U.S. dollar.
The renewed interest has driven the MSCI’s emerging market currency index up by approximately 7.5% over the past year. Emerging market local currency debt has returned nearly 20%, while the MSCI’s emerging market stocks index has surged by almost 40%. JP Morgan’s analysts noted that recent inflows into emerging markets since the beginning of the year have pushed the bank’s internal EM FX Risk Appetite Index into significantly overbought territory, exceeding the threshold that typically triggers a sell signal.
While acknowledging that emerging markets have faced various challenges since the start of the year, including issues related to Venezuela, Iran, U.S. Federal Reserve independence, U.S. Supreme Court rulings, and potential new tariffs, JP Morgan analysts suggest these factors were not the primary driver of the change in their EM foreign exchange outlook. They cautioned that these areas of concern could potentially exacerbate each other, leading to market nervousness and a short-term pullback given low volatility and risk premiums globally.
