JPMorgan Global Emerging Markets Income 13 January 2023

In a difficult year for emerging markets, many of JPMorgan Global Emerging Markets Income’s (JEMI) qualities have shone through. The portfolio is run with an income objective, which brings with it a bias to lower beta stocks and sectors. This is offset by modest Gearing, but has nonetheless led to relative resilience during 2022 with the portfolio performing roughly in line with the benchmark (and much better than the sector) while delivering a much higher yield.

The portfolio is managed by Omar Negyal, Jeffrey Roskell and Isaac Thong of the JPMorgan Emerging Markets and Asia Pacific (EMAP) Equities team. They describe 2022 as a ‘risk management year’, in which they have had to contend with the fallout of the Russian invasion of Ukraine, the volatility caused by skyrocketing inflation in various countries and the impact of China’s belatedly abandoned zero-COVID policy. The result has been to lower valuations across their investment universe, which means they are finding higher quality companies with more attractive yields available for less demanding valuations.

JEMI’s discount has widened over 2022, but stabilised and even narrowed in the last two months of the year as China has committed to reopening and global markets have been firmer. At the time of writing it is 8.4%, the trust having traded on a premium at times in the past when emerging markets are in favour.

JEMI is the only emerging markets trust with an income mandate, and yields 3.9% at the time of writing. The dividend was more than covered in the 2022 financial year after two years of COVID disruption, and the trust has healthy revenue reserves too (see Dividend).

In our view, JEMI could be an interesting option for investors looking to dip their toe back into emerging markets after a difficult 18 months. The portfolio is relatively defensive and balanced stylistically, without a strongly pronounced value or growth bias. That said, it is more exposed to value than its peers, which could be helpful in a period of higher interest rates and inflation, and may also provide more cushion on the downside. The income objective meanwhile means that investors receive an income while they wait for the market to recover. JEMI is trading on a discount at the time of writing too which provides more outperformance potential in any future recovery.

We note that the team are currently projecting a very high five year expected return of c. 17% a year from their portfolio , based on their bottom up analysis. This is only a model of course, and has to be tempered with the risks to the short-term outlook which are hard to quantify (relating to war, international relations and related issues). Nevertheless, for investors with a long-term perspective this looks like it may prove to be a good long-term entry point.

For income investors looking to diversify their sources of yield, JEMI not only offers geographical diversification, but also sectoral. This is because its market contains many companies in traditional growth sectors, such as technology, which deliver a high yield. Despite some variability in the income received (see Dividend), the board has managed to deliver a stable or growing dividend through the pandemic, and the dividend is now more than covered with healthy revenue reserves.