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JPMorgan's Sullivan says Fed rate hikes won't sink emerging markets

Things may not turn sour for emerging markets if the Federal Reserve raises U.S. interest rates this year, according to JPMorgan's equity research head for Asia ex-Japan.

James Sullivan told CNBC's "Capital Connection" on Wednesday the impact of higher interest rates in the U.S. could be felt in two areas — global economic growth and the dollar. But developments in both areas point to a positive view on emerging markets, he noted.

Sullivan said JPMorgan's house view is that the greenback was already inflated to a 14-year trade-weighted high. "We don't have a lot of upside left to the dollar, which helps drive a positive view on emerging markets," he said.

EMs are sensitive to U.S. interest rate changes because many governments and companies borrow in dollars. An increase in rates can lead to a stronger dollar and to greater capital outflows from EMs, as investors seek returns.

On global growth, Sullivan said he saw a "very strong" rebound in global manufacturing. This is a positive for EMs, particularly those heavily involved in manufacturing, he said.

Fed Chair Janet Yellen told Congress on Tuesday that waiting too long to raise interest rates would be "unwise" as economic growth continues and inflation rises. When the Fed last hiked rates at its December 2016 meeting, Federal Open Market Committee members indicated three more increases were likely in 2017, though many market watchers realistically now expect just two moves.

JPMorgan expects the first rate hike for the year to come at the June meeting.

Didier Marti | Getty Images

The market appears to be taking note. Despite the possibility of upcoming Fed rate hikes, a relatively stronger dollar and threats of trade wars from the Trump administration, investors did not shy away from emerging markets. The iShares Core MSCI Emerging Markets ETF took in $1.7 billion from investors in January, ranking fourth among all exchange-traded funds.

Sullivan pointed out investors come to EMs for very specific reasons, with the most important one being a positive growth differential to developed markets.

"We are looking at 15 percent emerging markets EPS growth in 2017 versus only 12 percent for developed markets. As you're seeing that very clear shift, which is leading EM to outperform."

— CNBC's Jeff Cox and Constance Gustke contributed to this report.

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