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JPMorgan's US$50b fund halves EM holdings on trade war risk

Singapore

A US interest-rate cut may be on the horizon, but a JPMorgan Asset Management fund is turning away from emerging-market (EM) assets.

The money manager's Global Income Fund has halved its holdings of developing-nation fixed income and equities to 3 per cent each, opting instead to buy European corporate junk bonds and Treasuries, according to its co-manager Eric Bernbaum.

The US$50 billion strategy is sceptical about emerging Asia's prospects due to the region's exposure to the US-China trade war.

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"The area that we've seen the most deterioration in - and the most weakness - is in the emerging-markets complex, particularly ex-China," the New York-based Mr Bernbaum said.

"We're thinking of areas like Korea, Taiwan, Singapore - those regions and countries that are very exposed to global trade uncertainty, disruption of supply chains and waning demand."

Mr Bernbaum's call serves as a warning as traders celebrate the coming US interest-rate cut by piling into risk assets.

Even if the Fed eases, Asia's export-reliant economies must still contend with the damage wrought by the trade war, with no sign that the dispute will be resolved anytime soon.

While Washington has restarted high-level talks with Beijing, the truce is far from a game-changer, according to Mr Bernbaum. Thorny issues such as intellectual property rights and cybersecurity still persist.

"I would say there would be no huge, ground-breaking resolution on the longer-term structural issues," Mr Bernbaum added. "There's still going to be ongoing uncertainty."

If preliminary data on South Korea's exports are any guide, more weakness may be in store for emerging Asia's economies.

Shipments from Korea fell 2.6 per cent in the first 10 days of July, with sales of semiconductors down by a quarter from a year earlier.

The strategy, among JPMorgan Asset's biggest mutual funds, sold the bulk of its five-year Treasuries holdings about a month ago and has been buying 10-year notes where it sees more value, Mr Bernbaum said before Fed chairman Jerome Powell's testimony to Congress on Wednesday.

"If investors globally are looking for safe duration with some yield, the US 10-year, the belly of the US curve, is actually not a bad place to be," he noted.

JPMorgan expects the Fed to cut rates by a quarter of a percentage point in July, and potentially once more by year-end.

Mr Powell indicated on Wednesday that policy makers are preparing to lower interest rates due to a cooling global economy and no sign of overheating in the jobs market at home. BLOOMBERG