Why emerging markets could lead global equities in 2H

JPMorgan says emerging market equities are positioned for a significant H2 rally, citing record-cheap relative valuations, a 12x forward P/E, and low institutional positioning. The bank also expects a reversal in hawkish central bank pricing, a softer U.S. dollar, improving China growth signals, and further upside from AI-related EM semis and memory chips. It recommends treating conflict-driven dips as buying opportunities, with EM looking attractive versus developed markets.

Analysis

This is less a broad EM macro call than a cross-asset bet on two crowded dislocations unwinding: the dollar’s exceptionalism and the market’s under-appreciation of EM earnings leverage to AI capex. If the dollar mean-reverts even partway, that is a mechanical earnings and multiple tailwind for EM exporters, local-rate debt, and dollar-funded balance sheets; the second-order effect is that passive flows can compound quickly because EM is currently under-owned, so modest inflows can force much larger price adjustment than fundamentals alone justify.

The more interesting angle is that JPM is implicitly saying the AI trade is not exhausted; it is migrating down the cost curve. That tends to benefit the picks-and-shovels layer first—memory, foundry, packaging, equipment suppliers, and select industrial tech across Asia—while pressuring developed-market megacap AI leaders to defend valuations with ever-better execution. If EM AI beneficiaries start rerating, they can siphon marginal capital from U.S. semis, especially if the market stops paying infinite duration for every AI-linked growth stream.

The key risk is timing, not direction. EM can stay cheap for months if U.S. growth stays resilient and the Fed delays easing, while geopolitical headlines can keep the dollar bid and suppress risk appetite. Also, any disappointment in China’s policy transmission or a failed U.S.-China summit would hit the most crowded part of the thesis first: cyclicals and semis with China beta, where positioning has historically been too quick to extrapolate green shoots into durable demand.

Contrarian takeaway: the trade is probably under-owned, but not because EM is obviously inexpensive—it is because investors still treat EM as a macro beta sleeve rather than a differentiated AI and FX beneficiary set. That creates opportunity in select names, but not necessarily in the broad index; the best risk/reward is to own the specific operating leverage to a weaker dollar and AI supply-chain normalization while fading the idea that every EM asset deserves a blanket rerating.

Key Decisions for Investors

• Go long EEM vs short IWM for a 3-6 month horizon: if the dollar rolls over and EM inflows accelerate, EM should outperform U.S. small caps on both valuation and earnings revision breadth; use a tight risk stop if DXY re-breaks higher.
• Build a basket long in EM semiconductor exposure via TSM and MU on pullbacks over the next 1-2 months: the setup favors supply-constrained memory and foundry names before consensus fully prices 2H next-year supply relief; risk/reward is attractive as long as channel checks do not show inventory normalization too early.
• Pair trade long FXI / short QQQ call spreads for 2-4 months: this isolates the valuation catch-up in China/EM tech versus U.S. megacap multiple compression if AI leadership broadens; keep defined downside with options because policy headline risk remains high.
• Add exposure to local-currency EM debt ETFs or EMFX proxies over the next quarter: the best asymmetry is in currencies and duration-sensitive assets if the market starts pricing a softer dollar and easier central banks; this is a cleaner expression than broad EM equities if growth data remain mixed.
• Avoid chasing the broad EM index after a sharp move; instead stage entries on 5-7% pullbacks or on confirmation of DXY weakness below recent support, since the trade’s convexity improves materially once the market stops paying for the dollar premium.