By Nora Redmond

Strategists say emerging markets are headed for a solid second half of the year

JPMorgan sees a solid second half of the year for international equities, especially emerging markets.

With the second half of the year in motion, JPMorgan is advising investors to take advantage of any dips in global equities, including the recent pullback for chip stocks.

Mislav Matejka, head of global and European equity strategy, and his team reiterated in a note on Monday how they have argued since the start of the war in Iran that any equity weakness should be seen as an opportunity to buy. And while risks of "renewed flare-ups" and headlines that could rattle investors, those dips should still be bought.

"If the conflict impact keeps getting priced out, as we suspect, then oil price, inflation rates, inflation expectations, bond yields, central banks rate projections, and even eventually USD, could all reverse their upmove that was seen during the second quarter," they said.

The strategists outlined several factors that could drive up global stocks, such as economies that have stayed resilient despite the conflict in the Middle East. Central banks refrained from aggressive tightening cycles amid economic growth, a trend which Matejka and his team do not see changing dramatically.

Neither do they see inflation expectations "becoming unanchored," or the bond yield spike seen since the start of the conflict continuing. The dollar DXYhas acted as a safe haven throughout the past few months, but is becoming stronger, and international equities, in particular, tend to prefer a weaker dollar, the strategists wrote.

Strong earnings are also an expected driver for stocks. They said that while valuations in the U.S. still appear to be stretched, international equity markets have become more attractive, with Taiwan's forward price-to-earnings ratio up 11% since the start of the war, Italy up 1.5% and Spain up 0.6%.

The strategists added that artificial intelligence is "unlikely to be the only story in town" over the next six months despite dominating market performance during the conflict. They expect fresh highs for global and emerging market stocks and are particularly bullish on Korean stocks KR:180721, with recent weakness presenting a chance to buy.

The eurozone proved to be a loser during the conflict after earnings already fell the previous year, but the strategists foresee earnings rebounding this year, led by value and cyclical stocks, small caps, exporters and markets like France joining the rally.

As for the U.S., they see another buying opportunity for the PHLX Semiconductor Sector index SOX, which has also seen recent weakness. They are less optimistic about big U.S. tech stocks. An exchange-traded fund tracking those, the Roundhill Magnificent Seven MAGS, is down 1.3% since the start of the year, according to FactSet data. JPMorgan equally advises staying cautious on AI "cannibalization sectors," like software, business services and media.

As far as themes are concerned, the strategists recommend reducing portfolio exposure to defense stocks, which they say aren't working despite the Iran conflict. They are positive on basic resources, again saying recent weakness is a chance to add, and that gold (GC00) could start to "look interesting."

One final driver that could push equities higher, is that investors have stayed cautious, with plenty of cash still available to buy any dips, which are often common in the summer months, said the strategists.

-Nora Redmond

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