Investing in emerging markets in a maturing global cycleContributor Austin Forey
Many emerging market investors may be wary of the relatively sluggish global economy and signs of a maturing global cycle. However, Austin Forey, lead portfolio manager for the JPMorgan Emerging Markets Investment Trust, views any signs of a potential slowdown as a natural part of long-term investing.
It’s certainly true that low commodity prices and a strong dollar have been a challenge for emerging markets for some time, meanwhile in recent months uncertainty about the ongoing global geopolitical situation has caused heightened levels of volatility for many emerging market equities.
Potential rewards from investing in emerging markets
However, it’s important to realise that the broad picture fails to reflect the vastness and complexity of emerging markets as an asset class.
For investors with a long-term outlook and access to the right expertise, the potential rewards from investing in the right emerging market companies is significant.
In the past five years the JPMorgan Emerging Markets Investment Trust has returned 93.5%, materially outperforming the benchmark of 58.4%. So, whatever the global economy has in store, I remain confident in the potential of our emerging market investments to perform over the long term.
The trust has been in existence since 1991, and while past evidence should never be treated as an accurate predictor of future performance, it does provide a certain degree of perspective. Having been at the helm for over 25 years, I’ve seen the trust grow through multiple market cycles and can point to the muted impact both of the 1997 Asian crisis and of the 2008 global financial crisis on its overall performance.
Long-term growth through sustainable companies
However, far more importantly, our investment philosophy is focused on long-term growth, and that we achieve this through a portfolio of companies which are sustainable in the broadest sense of the word.
At a quantitative level we’re interested in return on equity as a proxy for the calibre of a business. Levels of debt are also a key indicator. However, underlying strong economic performance there must be a robust business model: the ‘G’ for governance in ESG (Environmental, Social and Governance) is fundamental. How is a company run and financed? Is it in charge of its own destiny? How does it position itself against competitors? What is the longer-term strategy and are the resources in place to make it happen?
The benefits of experience and scale in the local markets
Getting under the skin of a business to gain a true understanding of the culture and philosophy underlying the facts and figures is central to our approach. Fortunately the scale, diversity, local expertise and global reach of our 37-strong research team means we can claim a depth of understanding few competitors can rival. It allows us to have strong conviction in the holdings in our portfolio, because we have confidence that they have the resilience to thrive in adversity.
In fact, for well-run companies in control of their own destiny, the healthy market weakness represented by a flattening of the market cycle provides a potential opportunity, because less well-run competitors will inevitably struggle.
What’s more, as investors equipped with clear information on our target holdings’ fundamentals, we see the short-term impact of choppier markets on the valuations of even the strongest stocks as an opportunity to buy at attractive prices.
So, while I don’t claim to be able to predict what the global economy has in store for emerging markets as an asset class, I can say with confidence that our process for selecting stocks works, putting the trust in a strong position whatever the future holds.
JPMorgan Emerging Markets Investment Trust plc
Quarterly rolling 12 months - as at end of June 2019 (%)
Past performance is not a guide to current and future performance. Source: J.P. Morgan Asset Management/Morningstar. Net asset value performance data has been calculated on a NAV to NAV basis, including ongoing charges and any applicable fees, with any income reinvested, in GBP.
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 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.