Investing in emerging market equities requires experienced portfolio managers that can fully assess the risk and reward of every position.
The diversity of emerging market companies is staggering. The MSCI Emerging Markets Index includes 1,330 companies across 24 countries, ranging from some of the biggest enterprises in the world to small domestic players. The businesses range from highly cyclical to high growth with valuations that can be attractive or extremely expensive.
Making investment decisions in a notoriously volatile asset class such as emerging markets requires a strong, consistent process that focuses on high-conviction, long-term winners. The portfolio managers of JPMorgan Emerging Markets Investment Trust plc (JMG) aim to select the highest-quality businesses across the emerging markets and buy them at prices that allow for upside over time.
This investment process has generated strong returns for the trust over the last 10 years, but will naturally suffer periods of short-term underperformance. A closer look at the recent market environment helps explain JMG’s recent performance and its positioning to deliver future returns to its shareholders.
Staying disciplined in India’s bull market
India’s strong economic growth has lifted many businesses and fuelled a historic bull market. JMG has been well positioned for the rally in Indian stocks: India is one of the largest country overweights in the trust and the Indian companies owned in the portfolio have performed well.
However, the trust has not owned several lower quality, highly valued banking stocks that are in the benchmark and have performed very well this year. This positioning has accounted for the majority of JMG’s underperformance vs. the MSCI Emerging Markets Index so far in 2024. JMG’s portfolio managers seek high-quality businesses at attractive valuations because these companies tend to be able to weather challenging environments while also participating in stronger markets. Similarly, the portfolio managers tend to avoid lower-quality companies because these businesses are more vulnerable when the economic cycle or stock market turns down, leading to underperformance.
Currently, India’ strong economy and bull market is benefiting many kinds of businesses—companies with stressed balance sheets are starting to show some improvement and highly cyclical businesses are posting stronger earnings. Even stocks of companies facing regulatory uncertainty or with corporate governance issues are getting a lift. JMG’s portfolio managers do not expect these kinds of stocks to outperform over the long term but recent strong returns have been a headwind for JMG’s relative performance.
Some of the Indian stocks that recently outperformed are indeed high-quality companies but have very high valuations—in some cases, a price-to-earnings (P/E) ratio of 100x. JMG does not typically own stocks at this valuation level because the portfolio managers cannot find realistic risk/reward scenarios to support the case for investment. For context, the forward P/E for the MSCI Emerging Market Index is roughly 20x-25x, which is already high relative to history and has often preceded a period of weaker market returns. The portfolio managers believe current valuations are pricing in only the very best-case scenarios for these companies. They offer little or no upside as they grow into their lofty valuations, while also coming with significant downside risk if that best case does not materialise.
Diversifying further out of China
China has been one of the largest country underweights for JMG, which has been helpful for relative performance. Recognising the continued challenges in China’s economy, the portfolio managers have recently exited a number of small positions in Chinese stocks—seven of nine companies recently sold were based in China. The portfolio managers have been finding a wide variety of new investment candidates elsewhere, and have used the proceeds to fund seven new positions across seven different country markets. A few of these are smaller cap companies, where exciting new opportunities are now being found.
Overall, the trust’s sector and market positioning has remained relatively stable. The portfolio managers still find the most opportunities in the consumer, financials, technology sectors and remain underweight the energy and materials sectors, which have many cyclical stocks.
From a country standpoint, JMG is most overweight to Hong Kong, Argentina and India compared to the benchmark and is most underweight China, South Korea and Saudi Arabia.
Find out more about JPMorgan Emerging Markets Investment Trust plc
Disclosures
Summary Risk Indicator:
The risk indicator assumes you keep the product for 5 year(s). The risk of the product may be significantly higher if held for less than the recommended holding period.
Investment Objective:
This Company aims to maximise total returns from Emerging Markets and provides investors with a diversified portfolio of shares in companies which the Manager believe offer the most attractive opportunities for growth. The Company can hold up to 10% cash or utilise gearing of up to 20% of net assets where appropriate. Gearing may magnify gains or losses experienced by the Company.
Risk Profile:
Exchange rate changes may cause the value of underlying overseas investments to go down as well as up.
Investments in emerging markets may involve a higher element of risk due to political and economic instability and underdeveloped markets and systems. Shares may also be traded less frequently than those on established markets. This means that there may be difficulty in both buying and selling shares and individual share prices may be subject to short-term price fluctuations.
Where permitted, a Company may invest in other investment funds that utilise gearing (borrowing) which will exaggerate market movements both up and down.
External factors may cause an entire asset class to decline in value. Prices and values of all shares or all bonds and income could decline at the same time, or fluctuate in response to the performance of individual companies and general market conditions.
This Company may utilise gearing (borrowing) which will exaggerate market movements both up and down.
This Company may also invest in smaller companies which may increase its risk profile.
The share price may trade at a discount to the Net Asset Value of the Company.
The Company may invest in China A-Shares through the Shanghai-Hong Kong Stock Connect program which is subject to regulatory change, quota limitations and also operational constraints which may result in increased counterparty risk.
This is a marketing communication and as such the views contained herein do not form part of an offer, nor are they to be taken as advice or a recommendation, to buy or sell any investment or interest thereto. Reliance upon information in this material is at the sole discretion of the reader. Any research in this document has been obtained and may have been acted upon by J.P. Morgan Asset Management for its own purpose. The results of such research are being made available as additional information and do not necessarily reflect the views of J.P. Morgan Asset Management. Any forecasts, figures, opinions, statements of financial market trends or investment techniques and strategies expressed are unless otherwise stated, J.P. Morgan Asset Management’s own at the date of this document. They are considered to be reliable at the time of writing, may not necessarily be all inclusive and are not guaranteed as to accuracy. They may be subject to change without reference or notification to you. It should be noted that the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Changes in exchange rates may have an adverse effect on the value, price or income of the products or underlying overseas investments. Past performance and yield are not reliable indicators of current and future results. There is no guarantee that any forecast made will come to pass. Furthermore, whilst it is the intention to achieve the investment objective of the investment products, there can be no assurance that those objectives will be met. J.P. Morgan Asset Management is the brand name for the asset management business of JPMorgan Chase & Co. and its affiliates worldwide. To the extent permitted by applicable law, we may record telephone calls and monitor electronic communications to comply with our legal and regulatory obligations and internal policies. Personal data will be collected, stored and processed by J.P. Morgan Asset Management in accordance with our EMEA Privacy Policy www.jpmorgan.com/emea-privacy-policy. Investment is subject to documentation. The Annual Reports and Financial Statements, AIFMD art. 23 Investor Disclosure Document and PRIIPs Key Information Document can be obtained in English from JPMorgan Funds Limited or at www.jpmam.co.uk/investmenttrust. This communication is issued by JPMorgan Asset Management (UK) Limited, which is authorised and regulated in the UK by the Financial Conduct Authority. Registered in England No: 01161446. Registered address: 25 Bank Street, Canary Wharf, London E14 5JP.
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