Emerging Markets Poised for 2H Rally on 12x P/E and AI Trade
Emerging market equities trade at a record-low 12x forward P/E versus developed markets and could outperform in the second half as central banks pivot from hawkish policies and the U.S. dollar softens 10-15%. JPMorgan maintains an overweight stance, highlighting cheaper AI-related semiconductor valuations and early Chinese growth signals.
1. Overweight Stance and Valuation Gap
The firm continues to overweight emerging markets relative to developed markets after a prolonged downturn since 2008. EM equities currently trade at an absolute 12x forward P/E, representing a historic valuation gap compared with developed markets and suggesting significant upside potential as investor positioning remains low.
2. AI Trade and Semiconductor Rally
Emerging market AI plays offer cheaper valuations and substantial upside versus megacap technology firms in developed markets. The aggressive rally in memory chips is underpinned by strong fundamentals, with no meaningful supply additions expected until the second half of next year, keeping sector sentiment bullish.
3. Macro Backdrop and Dollar Impact
Market pricing of central bank hawkishness is set to reverse in the second half as policy pivots emerge, while the U.S. dollar—trading at a 10-15% long-term premium—may soften. Historically, a weakening greenback has bolstered EM assets by easing external funding costs and enhancing export competitiveness.
4. China Recovery and Geopolitical Outlook
Evidence of economic green shoots in China points to an inflection higher that could be supported by high-level U.S.-China engagement. Broader conflict-related selloffs are viewed as buying opportunities, reinforcing the bank’s thesis that dips driven by geopolitical uncertainty can offer attractive entry points into EM markets.