China impact on EMs is overstated: JPM Strategist
Market watchers are overestimating the impact of China's economic slowdown on emerging markets, JPMorgan's chief Asian and emerging market equity strategist said Monday.
Emerging markets suffered one of their worst routs on record last week, with investors pulling a combined $15.3 billion from bond and equity funds through Aug. 27. The MSCI Emerging Markets Index is down nearly 18 percent year to date.
But J.P. Morgan's Adrian Mowat noted the U.S. economy moved higher, and there was little impact on the rest of Asia when Japan's economy, then the world's second largest, turned lower in the early 1990s.
"It was an enormous economy that went into this protracted funk, and it made very little difference to the rest of Asia," he told CNBC's "Squawk Box." "I think people overestimate trade linkages."
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He acknowledged that imports into China are down 15 percent this year but said that slowdown had been happening for some time. In addition, he told CNBC, the impact beyond commodity producers is small, and there could be benefits to commodity importers.
J.P. Morgan is currently bullish on large emerging markets like China, South Korea, Taiwan and India. Mowat said investors should avoid commodity producers Brazil and Russia, which have entered recession.
China's stock market has sold off dramatically in recent months, first losing 30 percent in a weeks-long rout that began in June after the Shanghai composite (Shanghai Stock Exchange: .SSEC) ran up more than 100 percent during the previous year. It then fell anew earlier this month after China devalued its currency, spreading fear about the country's growth that sent global equity markets spiraling lower.
Mowat said there is little correlation between China's stock market and its economy.
"I think what I really hope is that we go back to not caring about Shanghai Comp," he said. "Remember this was a bear market from 2007 until June last year. The poor market's only up 45 percent in the last 12 months, and that never seems to come up."
While the bulk of macroeconomic data from China remains poor, there are bright spots, he said. He noted property sales are up 20 percent, and the real estate market has a more significant impact on the economy.
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In the end, the emerging market outlook comes back to the Federal Reserve, he said. The central bank is widely expected to lift its benchmark fed funds rate from near zero, possibly as soon as September.
Investors are remaining on the sidelines when it comes to emerging markets because they fear higher borrowing costs will have negative impact, Mowat said. However, history has not always produced that result, he added.
"I'd make people look at 2004. If you bought emerging markets on the day the Fed moved, you made a very large return, and part of that was just an unwinding of people's fears," he said.
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