JP Morgan strategists have reduced their outlook on emerging market currencies to “market weight” from “overweight,” citing stretched positioning after a prolonged rally.
The bank said recent gains have pushed short-term investor exposure into overbought territory, increasing the risk of a near-term pullback.
In a note to clients, the strategists stated, “There are times to reduce risk in the short term due to overcrowding and this is one of those times in our view.”
Alongside the broader downgrade, the bank also trimmed its stance on South Africa’s rand after previously cutting exposure to parts of central and eastern Europe.
Strong Year Drives Profit-Taking Signals
Emerging market currencies and assets have performed strongly over the past year as investors were drawn by higher interest rates and relatively cheap valuations.
A nearly 10% decline in the U.S. dollar over the same period added further support to currencies across developing economies.
Over the last 12 months, a key emerging market currency index has gained roughly 7.5%, while local currency debt returns have approached 20%.
Equities have also surged, with emerging market stocks rising close to 40% during the rally.
JP Morgan analysts noted that fresh inflows at the start of the year pushed the bank’s internal risk appetite index well above levels that typically trigger a sell signal.
Rising Sensitivity To Global Headlines
While the downgrade was driven mainly by positioning, strategists acknowledged that markets have faced growing political and economic uncertainty.
Developments ranging from geopolitical tensions to questions around U.S. monetary policy independence have added layers of complexity for investors.
The bank warned that crowded trades often become more sensitive to negative news, even when underlying fundamentals remain intact.
“We often find that once the market is already over-positioned it can become nervous about newsflow that it might otherwise downplay,” the note said.
With volatility and risk premiums starting from historically low levels, JP Morgan expects any shift in sentiment to show up quickly through short-term price corrections.
