Marketing communication
With several decades of experience in emerging market (EM) equities, Austin Forey, portfolio manager of the JPMorgan Emerging Markets Investment Trust plc (JMG), shares his seven truths about successful investing in this diverse asset class.
1. A country’s macroeconomic growth is not enough of a reason to invest in a stock
Even decades ago, in a time of higher growth across much of the EM universe, investing in a stock or market principally based on macroeconomic growth was a risky and volatile strategy. As emerging markets have matured, the relationship between macroeconomic growth and equity outperformance is even less straightforward.
The two largest economies in the world—the US and China—are a prime example. The US stock market has been one of the best-performing in the world—even without exceptionally high GDP growth. Its growth is lower than China’s, which remains one of the fastest-growing economies but has been one of the worst-performing stock markets.
2. An attractive company in a strong economy with a rallying stock market does not guarantee outperformance
This is the portfolio’s experience in India recently, where much of the market’s outperformance has come from investor enthusiasm for local companies—and has now led to high valuations, in many cases.
JMG has invested in India’s structural growth story via a diverse mix of companies for many years and continues to have around a 25% weight in Indian stocks. Many of the businesses that JMG owns are reporting solid earnings and have healthy fundamentals yet their shares have not participated in the full extent of the rally. For example, the portfolio’s large holdings in the information technology (IT) services sector are more exposed to the global economy, where the business cycle has been more subdued.
Similarly, some of JMG’s holdings in Indian banking stocks are reporting double-digit growth, which is more than most banks globally. They are performing well operationally, and are benefiting from digitalisation and the shift from state-owned to private banks. While these stocks are lagging the broader Indian market, we believe they will catch up soon.
3. Recognise when a situation changes and adapt
That generally describes how we’re thinking about China in the portfolio. The Chinese economy has slowed, especially in the consumer sectors, where confidence is low and spending is still weak. This environment is leading to intense price competition in many sectors and putting pressure on corporate margins and earnings. Many share prices have fallen, reflecting this reality, but that’s left a lot of Chinese stocks attractively valued. Now we’re finding opportunities in this market.
While the macroeconomic environment does not drive our investment decisions, it’s still important to understand how the economy affects the companies in which we might invest. J.P. Morgan Asset Management has a new head of China, David Gleason, who previously led the firm’s Japan research effort. He is focused on looking across analyst numbers and across markets to make sure that assumptions and estimates add up. In the case of China, he is making sure that the reality of China’s lower growth rate is filtering through all of our forecasts.
4. Slower-growing economies can still produce fast-growing companies
Latin America has been one of the more challenging emerging market regions for the past decade. Brazil in particular hasn’t provided an obvious backdrop for investment—with mediocre economic growth, a corruption scandal and very high interest rates. However, digital business models in the country are evolving rapidly and Brazil is now home to the world’s largest fully digital bank, which is taking market share and looking to expand. The company just listed on the stock exchange a few years ago and we have been adding to our position.
5. Understand what drives a business
While we spend some time understanding how the macroenvironment might impact a company’s operations, our focus is first and foremost on the company’s fundamentals, such as the business model, financials, competitive advantages and quality of the management team. Having a deep understanding of a company’s operations helps determine when to stay in an underperforming stock. For example, if the company is executing well but just not being rewarded by the market, we are likely to maintain the position; if it appears that the investment thesis will not play out, we are likely to sell.
6. Cycles can be long
Economic and market cycles can persist for periods of 10 years or more. Emerging market cycles can also differ by region—while Latin America has been a challenging environment for much of the past decade, China led the index for part of it and now India’s stock market is booming. Investors need to be prepared to take a long-term view and diversify exposure.
7. Emerging market equity investing is not for pessimists
The asset class can be more volatile than developed market equities and requires looking forward to spot an opportunity—whether an innovative business model or a turnaround story—before it has been fully valued by the market. That means investing when risks may be higher—but that’s also what tends to lead to higher rewards.
Guided by these seven truths, JMG’s experienced team has learned how to focus on what matters, make disciplined decisions and find opportunities across all regions and sectors, despite the more challenging market environment of recent years.
Find out more about JMG >
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
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Exchange rate changes may cause the value of underlying overseas investments to go down as well as up.
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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.
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Where permitted, a Company may invest in other investment funds that utilise gearing (borrowing) which will exaggerate market movements both up and down.
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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.
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This Company may utilise gearing (borrowing) which will exaggerate market movements both up and down.
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This Company may also invest in smaller companies which may increase its risk profile.
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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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