Why you should consider Emerging Markets for the long-term today
The term “emerging markets” is used to describe developing economies across the world. These include some of the most populous nations, such as China, India, Brazil and Russia as well as smaller countries including Mexico, South Africa and Saudi Arabia.
These fast-growing regions are driving global growth at present and look set to be the leading economic powerhouses of tomorrow. Meaning today’s investors should not overlook emerging markets.
These countries may be diverse yet they typically exhibit attractive demographics and a growing “middle class” which are the key drivers behind their economic growth.
The figures speak for themselves. According to J.P. Morgan Asset Management, emerging GDP in emerging markets is estimated to be 4.5 per cent in 2018; this compares to just 1.75pc in the US and 1.25pc in the UK.
These are materially important markets which allow investors to diversify their portfolios and access more sustainable, long-term growth opportunities versus developed markets peers.
Why invest in emerging markets now?
Emerging markets have matured in recent years and now offer a different investment environment to that of the 1990s and early 2000s.
Political and economic reforms have helped build stronger and more stable economies, with larger reserves and far less debt.
A more mature corporate market is reflected in the fact that far more companies in these regions now share profits with investors via dividends payments. Emerging markets today have outperformed many European and US markets, where growth has slowed in recent years. Valuations are also looking attractive relative to long-term averages, as short-term market movements mean that share prices and markets have had a challenging period in 2018 but fundamentals remain compelling.
Managing emerging market risks
This is not to say that investing in emerging markets is not without risk.
One of the inherent challenges in these markets is dealing with volatility. Share prices, as well as currency valuations, can be subject to more sudden price movements, particularly when compared to developed markets.
Recent newspaper headlines concerning the economic problems in Argentina and Turkey certainly serve to highlight such short-term risks.
For investors, the key is to focus on the longer-term structural story, typically driven by the EM consumer. Volatility may present short-term challenges but it can also offer longer-term investment opportunities and the ability to buy into weakness.
This emphases the importance of working with emerging market specialists, who have on-the-ground experience and in-depth knowledge of these markets, to enable them to make longer-term appraisals and not be side tracked by short-term noise.
The importance of specialist knowledge
J.P. Morgan Asset Management takes a very active approach to emerging market investments. It takes what is known as a “bottom-up” approach: looking at the growth potential of specific companies rather than simply taking a view on individual countries.
This, it believes, is a sound way to deliver value to investors over the longer-term, by differentiating winners from losers
Investment trusts are ideally suited to facilitate this longer-term approach. The fact that these are closed-end funds means that managers are not forced to sell stock in times of market turbulence to fund redemptions.
Austin Forey, Fund Manager of the JPMorgan Emerging Markets Investment Trust says this long-term strategy is reflected in the company’s stock choice. Its investment philosophy is to choose profitable companies rather than successful countries, in other words to focus on micro not macro.
He says: “We have a bias towards companies with sustainable competitive advantages, consistent cash-flow generation and strong management teams."
“The portfolio continues to be positioned to benefit from the secular growth in emerging market consumption, including increasing penetration of financial products in under-banked markets.”
This includes long-term investments in HDFC and IndusInd, two private Indian banks that continue to capture market share.
The Company has recently added a holding in MercardoLibre, the largest e-commerce company in Latin America . Given that UK consumers spend around 19pc of their income online but only 3pc in Brazil, Austin says such companies offer huge potential.
He adds: “This approach has worked well for the portfolio over the long-term and the team remains confident that this is the right strategy to pursue in current market conditions.”
For further detail on Austin’s approach to managing the JPMorgan Emerging Markets Investment Trustview the video here
1 2018 Long-Term Capital Markets Assumptions Paper, J.P. Morgan Asset Management
2 The companies above are shown for illustrative purposes only. Their inclusion should not be interpreted as a recommendation to buy or sell
Investment Objective: The JPMorgan Emerging Markets Investment Trust plc aims to maximise total returns from Emerging Markets worldwide and provides investors with a diversified portfolio of shares in countries and sectors we 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.
Risk information: 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 trust may invest in other investment trusts that utilise gearing (borrowing) which will exaggerate market movements both up and down. l 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 trust may utilise gearing (borrowing) which will exaggerate market movements both up and down. This trust 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 Trust may invest in China AShares through the ShanghaiHongKong Stock Connect program which is subject to regulatory change, quota limitations and also operational constraints which may result in increased counterparty risk.