JPMorgan Dials Back Bullish Emerging-Markets Calls on Iran War

(Bloomberg) — JPMorgan Chase & Co. scaled back its overweight recommendations on emerging market currencies and local bonds due to risks posed by a U.S. attack on Iran.

Strategists led by Jonny Goulden, Anezka Christovova and Arindam Sandilya wrote on Monday morning that the reaction in emerging markets was negative but limited, offering an opportunity to reduce some of the risks as the conflict creates uncertainty on markets.

“Constructive structural themes for advanced fixed income continue,” they wrote. “However, markets are not adequately prepared for this short-term uncertainty due to the high exposure of EM FX, cuts in EM interest rates and the expensiveness of EM credit markets.”

Strategists said they had roughly halved the weights of their proposed overweight positions on emerging market currencies and bonds, adding that “we are likely to reduce further or re-add more quickly than usual given the unpredictability of armed conflict.”

The MSCI gauge of emerging currencies fell 0.9% on Monday morning, the biggest intraday drop in four months; The biggest decliners were the Hungarian forint and the Polish zloty.

The bank halved its bullish calls on the Hungarian forint and Turkish lira, while also halving its overly weighted calls on the South African and Romanian local currencies. Market weight recommendations for government and corporate loans remain unchanged, with a weak position in the Middle East.

Meanwhile, strategists remain bullish on Latin American currencies and rates as the region is less exposed to oil prices and has stronger carrying buffers.

“The duration of the conflict and what might happen next are important calls to make, inherently involving great uncertainty,” the strategists wrote. “Due to a broader range of Iranian targets being hit, there is a greater risk of further spillover into the global economy through oil and regional trade.”

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