After emerging markets' comeback rally this year, it's time to take some profit off the table, JPMorgan Cazenove said in a note Monday.
The MSCI Emerging Markets stock index has climbed around 12 percent so far this year, after a long downtrend ever since mid-2013, when the U.S. Federal Reserve first broached the idea that it would begin tapering its asset purchases, spurring massive outflows from the segment.
But so far this year, the consensus has turned "constructive" on emerging markets, JPMorgan Cazenove noted, adding that it had been overweight emerging markets compared with developed markets since the first quarter.
But now it believed this was a "good opportunity" to take profit, calling the move a "tactical" downgrade to neutral as valuations in its emerging market basket were "swiftly moving towards outright expensive territory."
It cited concerns that the Fed appeared headed for a December interest rate hike.
"Rising foreign-exchange and bond volatility could be a problem again, as expectations of a December Fed hike build," it said. "The dollar is moving back to the top of this year's range, emerging market foreign exchange is trading weaker again, and the Chinese yuan is hitting fresh lows."
The , which measures the greenback against a basket of currencies, has climbed recently. It was at 97.703 at 10:28 a.m. HK/SIN time, up from levels under 95 in mid-September.
has lost ground against the dollar, hitting six-year lows recently. At 10:31 a.m. HK/SIN, the greenback was fetching 6.7392 yuan, compared with levels below 6.12 yuan in August.
A stronger dollar tends to weigh on returns in emerging-market assets as local currencies fall and the cost of servicing dollar-denominated debts becomes more onerous.
JPMorgan Cazenove also noted that emerging market economic activity could "hit an air pocket" in the near term, citing disappointing China trade data and stalled purchasing managers' index data across emerging markets.
For September, China's exports tumbled 10.0 percent in dollar terms and imports fell 1.9 percent, well below market forecasts.
It noted that earnings per share forecasts have also been revised lower recently, although it expected that in the medium term, emerging market earnings were bottoming.
The note also said U.S. elections were a consideration for the tactical downgrade. But it noted that while a victory for Republican nominee Donald Trump would likely be negative for emerging markets assets, in part due to his protectionist trade policies, the probability had already fallen dramatically.
"We do not believe that a [Hillary] Clinton victory would result in a significant relief rally for emerging market equities, given that they are at year-to-date highs already, and given that it is by now widely assumed that she will win," the note said.
"Post elections, the market is likely to quickly refocus on the Fed, which is then going to have a clear path to resume tightening, in our view," it said.
But JPMorgan Cazenove said that its downgrade for emerging markets wasn't a longer term play.
"Medium term, we believe that the emerging market backdrop will keep improving, with relative growth and earnings differential likely bottoming out," it said. "We would use a potential weakness into year-end as ultimately a buying opportunity."
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—By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1