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David Kimberley
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Updated 07 Jul 2022
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Disclosure – Non-Independent Marketing Communication

This is a non-independent marketing communication commissioned by JPMorgan Asia Growth & Income. 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.

Even prior to the events of 2022, investors in Asia were going through a challenging period. Heavy handed regulatory crackdowns by the Chinese government were the main driver, with firms in the world’s second-largest economy – a mainstay in most Asia portfolios – suffering as a result.

Inflationary fears, continual lockdowns in China, and the war in Ukraine have all led to more risk being taken off the table in 2022. Asia hasn’t been immune from this, even if countries in the continent seem less likely to be impacted by war in Europe and, in many instances, appear to have a better handle on rising prices than their Western peers.

But just as irrational exuberance can mean share prices become so high they’re no longer tied to company fundamentals, so too can the mixture of panicking and indiscriminate selling lead to investors becoming unduly pessimistic about the long-term prospects of a business.

The difference is that bubbles do not typically lead to great opportunities for active investors. When companies are overvalued, you can’t do much apart from sit on the sidelines and wait for share prices to come down again. In contrast, indiscriminate selling and unwarranted pessimism can lead to a situation where businesses are undervalued and opportunities to buy arise.

JPMorgan Asia Growth & Income (JAGI) has been hit by these dynamics but has arguably also been able to take advantage of them. The trust, which invests in companies across Asia and pays a quarterly dividend, started the year trading at a small premium to NAV but that has since widened to an almost 11% discount as of 15/06/2022.

Partly that reflects the sell-off that we’ve seen almost across the board in Asia so far this year. But there’s also an argument to be made that some JAGI shareholders have oversold, as illustrated by the substantial widening of the discount.

Trust managers Ayaz Ebrahim and Robert Lloyd were underweight to China and India at the start of the year. Both countries have seen major sell-offs in 2022, with government policy in China and inflationary fears over high valuations in India the likely causes. Sell-offs in JAGI shares would make more sense if the trust was overweight to the two countries but it wasn’t, leaving you to wonder if investors weren’t being particularly nuanced when selling shares.

Detractors to JAGI’s relative performance more recently have been in areas like oil and gas. Failing to hold firms in the hydrocarbons sector is more a reflection of the long-term goals of the trust. If the managers had flipped into commodities businesses, it would’ve seemed more like they were chasing short-term performance, rather than focusing on the long-term returns they’re supposed to deliver.

The trust’s discount is also now far wider than the peer group average and its own 5-year average historical discount of 5.5%. One can never say with certainty that a discount will tighten but prospective long-term investors may find this an interesting entry point to the trust, with the potential for an additional boost to capital if market conditions ease.

Of course, that’s assuming the trust’s holdings have managed to retain their long-term potential in the face of a volatile 2022. There are certainly indications the trust managers believe this is the case. Since the start of the year, they’ve added to existing holdings in manufacturer Han’s Laser and the financial services group Singapore Exchange. Both companies have continued to produce solid earnings but saw drops in their share prices nonetheless.

It was a similar story with Infosys, an Indian IT consulting group. The company had not featured in the portfolio previously because it was trading at too great a premium valuation for the JAGI team. However, like lots of other high value tech businesses, it has seen a dramatic decline in its valuation this year, even as it continued to deliver respectable results. This allowed Robert and Ayaz to take a stake in the firm, as they believed its share price had fallen to such an extent that it warranted buying.

If further opportunities do arise then JAGI is also well positioned to take advantage of them. Despite being the best performer in its peer group over the past five years, JAGI used gearing sparingly in that time. Indeed, it wasn’t using gearing at all when markets started to fall in the final quarter of 2021.

That’s partly because the managers are cognisant of volatility in Asia but it’s also due to their sensitivity to valuations. Gearing is only used if the macro models the managers use indicate companies are undervalued. Gearing is currently not being utilised, meaning the managers are sitting on a lot of dry powder if more opportunities do present themselves.

It’s conceivable that will happen. Many of the pressures that have crimped share prices so far this year remain in play. As a result, it’s hard to see a swift recovery in markets in the near future.

But JAGI has always sought to be a long-term core holding for Asia investors. That remains true today, despite macroeconomic headwinds. The difference is that the current period of volatility and uncertainty has potentially provided an opening that both prospective JAGI investors and the trust’s managers can take advantage of.

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