JP Morgan's $50 billion fund turns its back on emerging market holdings

The bank is skeptical about emerging Asia’s prospects due to the region’s exposure to the US-China trade war

JPMorgan Chase, Citi, HSBC, seen from Canary Wharf, London. JPMorgan believes more weakness may be in store for emerging Asia’s economies. AFP

A US interest-rate cut may be on the horizon, but a JP Morgan Asset Management fund is turning away from emerging-market assets.

The money manager’s Global Income Fund has halved its holdings of developing-nation fixed income and equities to 3 per cent each, opting instead to buy European corporate junk bonds and Treasuries, according to its co-manager Eric Bernbaum. The $50 billion vehicle is skeptical about emerging Asia’s prospects due to the region’s exposure to the US-China trade war.

“The area that we’ve seen the most deterioration in - and the most weakness - is in the emerging-markets complex, particularly ex-China,” New York-based Mr Bernbaum said by phone. “We’re thinking of areas like Korea, Taiwan, Singapore - those regions and countries that are very exposed to global trade uncertainty, disruption of supply chains and waning demand.”

Mr Bernbaum’s call serves as a warning as traders celebrate the coming US interest-rate cut by piling into risk assets. Even if the Fed eases, Asia’s export-reliant economies must still contend with the damage wrought by the trade war, with no sign that the dispute will be resolved anytime soon.

While Washington has restarted high-level talks with Beijing, the truce is far from a game-changer, according to Mr Bernbaum. Thorny issues such as intellectual property rights and cybersecurity still persist. US President Donald Trump has complained that China didn’t boost purchases of American farm products as promised by his Chinese counterpart Xi Jinping last month.

“I would say there would be no huge, ground-breaking resolution on the longer-term structural issues,” Mr Bernbaum said. “There’s still going to be ongoing uncertainty.”

If recent data are any guide, more weakness may be in store for emerging Asia’s economies. Shipments from South Korea fell 2.6 per cent in the first 10 days of July, with sales of semiconductors down by a quarter from a year earlier.

Singapore’s economy shrank an annualised 3.4 per cent in the second quarter compared to the first three months of the year, missing economists’ forecast for a 0.5 per cent expansion, a report showed Friday. The city state’s exports have been badly hit by a slump in the electronics sector.

The strategy, among JP Morgan Asset’s biggest mutual funds, sold the bulk of its five-year Treasuries holdings about a month ago and has been buying 10-year notes where it sees more value, Bernbaum said before Fed Chairman Jerome Powell’s testimony to Congress on Wednesday.

Ten-year Treasury yields have declined 56 basis points in 2019 to 2.12 per cent, and more than a percentage point from the seven-year high of 3.26 per cent set in October.

“If investors globally are looking for safe duration with some yield, the US 10-year, the belly of the US curve, is actually not a bad place to be,” he said.

JP Morgan expects the Fed to cut rates by a quarter of a percentage point in July, and potentially once more by year-end.

Fed Chair Powell indicated on Wednesday that policymakers are preparing to lower interest rates due to a cooling global economy and no sign of overheating in the jobs market at home. He affirmed his view on Thursday, by telling the Senate Banking Committee there’s room to ease as the tie between the inflation and jobless rates has broken down.