JPMorgan Emerging Markets 12 April 2023
Disclosure – Non-Independent Marketing Communication
This is a non-independent marketing communication commissioned by JPMorgan Emerging Markets. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.
JPMorgan Emerging Markets Investment Trust (LON:JMG) aims to harness the exceptional growth potential in the leading companies in the emerging markets universe. Emerging markets can be volatile and complicated, particularly when the diversity of the underlying markets is considered. The basic strategy of the management team behind JMG is to blot out the noise and focus on identifying those businesses which have best earnings growth potential and hold onto them for the long term, refraining from over-reacting to cyclical ups and downs and thereby incurring transaction costs.
JMG has delivered excellent long-term returns to shareholders, as discussed under Performance. This has been driven by market-beating returns delivered by companies that have been held for over a decade and, in some cases, for multiple decades, compounding above-market earnings growth year-on-year. Last year saw volatile markets, but managers Austin Forey and John Citron stuck to their long-term strategy and made few changes to their portfolio. They note that some of the companies which underperformed the index last year are market-leaders in areas of secular growth, like global semiconductor giant TSMC. TSMC has made exceptional returns for JMG over the long run, and the managers believe it will outperform over future cycles too.
Austin has managed the portfolio since 1994, meaning he has truly exceptional experience investing in the region. He was joined by John as co-manager in 2021. One interesting trend over 2022 was the increase in the exposure to Chinese companies (including Hong Kong). The managers have historically found the high quality companies they would like to own in the country too expensive, but following a sharp sell-off in the country have now built up a roughly equal weight position for the first time (see Portfolio).
JMG trades on a discount of 9.4% to net asset value at the time of writing compared to a five-year average of 8.5%.
We think JMG is an appealing way to invest in emerging markets for the long run, with a sensible strategy that is consistently adhered to and backed by deep analytical resources. The focus on quality earnings growth and on good governance means any cyclical rally, particularly in energy and materials, will be a headwind, but over the long term the tactic of identifying high-quality, long-term earnings growth potential has alpha-generation potential. We think it is striking how one of last year’s biggest winners, India’s HDFC, has been owned since 1998, and TSMC since 1996. JMG’s strong returns show how effective a buy-and-hold strategy can be if stock selection is done well.
In the shorter term, emerging markets look in a better place than they did last year. USD strength weighed on the region, while China’s domestic issues – zero-COVID, problems in the real estate debt sector, and harsh regulation – also dragged the index down for most of the year. Given the changing rates outlook, USD strength has moderated, while the Chinese authorities have addressed last year’s challenges. With optimism picking up for the global economy, we think the outlook is for a better year than last year. This could end up being a decent time to buy, particularly given the near double digit discount on JMG’s shares, although we think investors always need to take a long-term view in emerging markets as Austin and John do.
- Long-term approach to stock picking has led to strong outperformance
- Huge research team allows for full and detailed coverage
- Preference for ungeared quality companies could prove beneficial in tough economic environments
- Strong style and sector biases could lead to underperformance at times
- Reticence to gear limits potential in rising markets (just as it limits losses in falling markets)
- Concentrated exposure means single stocks can impact returns negatively as well as positively