Webconference replay: Emerging Markets (June 2015)Contributor JPMAM UK
Leon Eidelman, Portfolio Manager for the JPM Emerging Markets Fund, discusses the macroeconomic background shaping the emerging markets, as well as the performance of the fund. Meanwhile, Emily Whiting, Client Portfolio Manager of the JPM Emerging Markets Income Fund, gives her update on the drivers of fund performance for the year to date.
Key topics and conclusions
In recent years, emerging markets have been out of favour among many asset allocators due to concerns about the effect on the asset class of a likely rate rise in the US. However, since the first "taper tantrum" in 2013, many emerging market (EM) currencies have weakened vs. the US dollar, suggesting that much of the pressure that would come from rising rates has begun to be priced in by the market. However, some currencies remain more vulnerable than others - notably the South African rand, the Indonesian rupiah and the Turkish lira.
JPM Emerging Markets Fund
- There has been a significant divergence in performance across the asset class this year, with EM growth decoupling from developed market (DM) growth, and the fund has been through a very painful period, experiencing its worst month since inception in April.
- China's government fears an aggressive slowdown of its economy and is devoting significant liquidity-led efforts to rectify the financial imbalances that were created through wide-ranging fiscal stimulus in 2008/2009. We retain our large overweight to the country.
- In India, despite Modi's much-vaunted growth agenda, the economy has not yet taken off and its equity markets remain lacklustre this year. Nevertheless, we remain confident in the long-term prospects for the country and retain our heavy overweight exposure.
- In Russia, sanctions are having a clear economic impact on domestic growth, with the current environment underscoring the long-standing sentiment that the country has always been the least predictable among the BRICs.
- Brazil continues to struggle with stagflation. Unlike India, which voted in change last year, the Brazilians voted in more of the same - only to find themselves mired in a large-scale corruption scandal.
- At a sector level, we have added to our overweight position in information technology, as corporates across the asset class are spending more to remain competitive, by including IT in their growth plans. Meanwhile, we see less predictable returns in sectors like utilities, energy and materials remain relative underweights for the portfolio.
- The key to growth in the asset class lies in evidence of an improvement in earnings-per-share growth, which will eventually drive up valuations.
JPM Emerging Markets Income Fund
- In terms of positioning, we remain underweight to India as it very much focused on growth, rather than on delivering dividends. Korea also continues to be held back by a weak dividend culture. Conversely, Taiwan represents our largest country overweight, thanks to its companies that focus on minority investors, have clear dividend policies and can deliver an attractive combination of income and growth. Meanwhile, Saudi Arabia represents a great diversifier: the market is opening up, with dividends high on companies' agenda, and we continue to find some interesting opportunities there.
- At a sector level, the fund remains focused on achieving broad diversification, but has a larger exposure to telecoms, which tend to be high dividend-payers, and a slight bias towards consumer sectors.
- The fund has had a challenging start to the year in performance terms, with 50% of the underperformance driven by China, where not holding some lower-quality names that did unexpectedly well had a negative impact. Our overweight to Taiwan also hurt, with near-term weakness from areas like Europe and Japan dampening performance.
- On the positive side, Russia has made a positive impact over the year to date. As bottom-up investors, we believe that Russia is home to some great companies that have continued to deliver - particularly in dividend terms - and yields in the country currently look attractive to yields elsewhere in the asset class.
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Please be aware that this material is for information purposes only. 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. JPMorgan Asset Management Marketing Limited accepts no legal responsibility or liability for any matter or opinion expressed in this material.
The value of investments and the income from them can fall as well as rise and investors may not get back the full amount invested. Past performance is not a guide to the future.