JPMorgan Dials Back Bullish Emerging-Markets Calls on Iran War

(Bloomberg) -- JPMorgan Chase & Co. dialed back the scale of its overweight recommendations on emerging-market currencies and local bonds due to the risks posed by the US attack on Iran. 

Strategists led by Jonny Goulden, Anezka Christovova and Arindam Sandilya wrote in a note that reactions in emerging markets Monday morning had been negative but limited, presenting an opportunity to reduce some exposure as the conflict casts uncertainty over markets.

“The constructive structural themes for EM fixed income remain,” they wrote. “But markets are not well-prepared for this near-term uncertainty, with EM FX highly positioned, EM rates pricing cuts, and EM credit markets expensive.”

The strategists said they cut the weightings of their recommended overweight positions on emerging-market currencies and bonds roughly in half, “with likelihood that we may reduce further or add back again in a shorter window than usual given the high unpredictability of armed conflicts.”

The MSCI benchmark for developing currencies slumped 0.9% Monday morning, the biggest intraday drop in four months, with the Hungarian forint and Polish zloty falling the most. 

The bank slashed bullish calls in the Hungarian forint and Turkish lira in half and halved its overweight calls on South Africa and Romania local rates. The marketweight recommendations in sovereign and corporate credit stay intact, with an underweight position in the Middle East. 

Meantime, the strategists remain bullish on Latin American currencies and rates as the region is less exposed to oil prices and have stronger carry buffers. 

“The duration of the conflict and what can come after are key calls to make, with an inherent large uncertainty,” the strategists wrote. “With a wider range of Iranian targets being hit, the risks are higher of a greater spillover to the global economy via oil and to regional business.”

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