JPMorgan Global Emerging Markets Income 22 April 2024

Omar Negyal and Isaac Thong are the managers of JPMorgan Global Emerging Markets Income (JEMI), supported by JPMorgan’s extensive network of country specialists, locally based sector analysts and a macro and quant team who help with stock selection (see Management). JEMI offers an attractive income (see Dividend) from a portfolio with higher growth prospects than the typical UK equity income fund by combining a focus on value and quality characteristics.

Currently, the team argue, opportunities in their universe are broadening, prompted by businesses wanting to better their own diversification. For instance, Mexico and Taiwan are benefiting from nearshoring, amplified as businesses look to diversify from China. Furthermore, lower valuations than developed markets and changes to dividend cultures have seen South Korea, a once structural underweight allocation, receiving greater attention via new investments Kia and KB Financial Group and the inclusion of two Chinese investments, JD.com and Tencent, following the decision from both to pay a dividend and commit more meaningfully to shareholder returns (see Portfolio).

The long-standing underweight in India remains, given elevated valuations, a decision that has detracted from Performance over the last 12 months. However, JEMI’s Taiwanese and Mexican investments have performed well, contributing to overall outperformance against the index. This underpins the team’s strategy of balancing yield and a disciplined focus on fundamentals, as well as diversifying sectors and geographies, to ensure there are multiple drivers of returns throughout a cycle.

Despite strong recent performance, JEMI’s Discount, currently 11.6%, exceeds its five-year average of 8.6%.

JEMI has been awarded a Kepler Growth Rating for 2024.

We think JEMI is a compelling option for income-hunters and those seeking exposure to emerging markets (EMs). The strategy employed combines a focus on value and quality, bringing with it a differentiated source of income growth and resilience less typical in UK or global equity income portfolios. Despite headwinds over the last five-years, JEMI has outperformed (see Performance), which we think reflects the effectiveness of balancing exposures to sectors and geographies and the ability to maintain an attractive income profile (without compromising on the quality of its underlying holdings or their long-term growth potential). Leveraging the extensive resources of the Emerging Markets & Asia Pacific team has also been advantageous to stock selection, in our view.

Recent discussions with the team highlighted their cautiously optimistic outlook on the region and brought to light their evolving views on some long-standing allocations. Despite economic pressures on China, consumption is stabilising, and valuations appear supportive, which, when combined with improving capital allocation, including a focus on dividend policies, has resulted in two new additions to the Portfolio. Following in a similar vein, South Korea, which the managers believe is showcasing revolutionary changes to its dividend culture, is no longer a structural underweight. Two investments, Kia and KB Financial Group, now feature in the underlying portfolio, given the changes to the dividend and long-term growth potential on offer.

While weak appetite for EM could continue to weigh on the discount in the near term, long-term prospects look promising, in our view, which could buoy performance and narrow the Discount. JEMI’s double-digit discount, wider than both its own five-year average and the sector’s, could therefore be an attractive entry point for long-term investors.