JPMorgan is ‘underweight’ financials in emerging markets

The outlook for banks is bleak and the financial industry will have a difficult time growing its business due to the coronavirus pandemic, according to JPMorgan, which has an “underweight” stance on the sector across emerging markets.

“I think we have a non-consensus view to run an underweight on financials across emerging markets, we think the outlook for banks — which is the largest chunk of financials — is a negative one no matter how you cut it,” Pedro Martins Junior, chief emerging markets equity strategist at JPMorgan, told CNBC’s “Squawk Box Asia” on Wednesday.

He said that banks have “very limited” space to expand their loan portfolios. And given that central banks around the world have cut interest rates to very low levels, the room for banks to boost their margins on loans and other products “is also very narrow,” he added.

Banks globally warned of a deteriorating outlook when they released their earnings reports in recent weeks. Lockdown measures in many countries forced businesses to temporarily shut and millions have lost their jobs, affecting the ability of both companies and households to repay their debt and take new bank loans.

In addition, the slump in oil prices has hurt many companies in the energy sector — and that could further increase the number of defaults and bad loans. 

Having an “underweight” position on banks is “a wholesale approach” to hedge against those problems that the financial sector has to grapple with, Martins said.

On top of the lackluster business outlook facing banks, some of them could come under government pressure to lend to riskier borrowers, Martins added.

“For specific countries, you might also have banks paying national service which would be in the form of pressure for the banks to lend with below-standard credit scores,” he said.

He added that some banks in emerging markets could also face the prospects of higher taxes in the coming years as governments seek to boost revenues after ramping up spending this year.

“So, we are underweight all financials across emerging markets.”