The current performance of the core groups of exposure in the JPMorgan Emerging Markets Investment Trust’s portfolio proves the benefits of a country and sector-agnostic, stock-specific approach.
Far from being a single amorphous entity, emerging market equities cover a vast range of regions, countries, sectors and business types. In uncertain times, negotiating the complexities of such a varied and volatile asset class demands a deep understanding of individual businesses, along with the nuances of the markets in which they operate. The JPMorgan Emerging Markets Investment Trust portfolio stems from a bottom-up, stock-specific investment philosophy which is firmly focused on long-term returns.
An in-depth examination of the composition of the Trust’s portfolio reveals a focus on three different core groups of exposure. However, this is less the result of a deliberate focus on these sectors than a consequence of a carefully structured selection process focused on fundamentals and growth potential. A look at the ongoing performance of each of these sectors and some specific examples of holdings will help illustrate the rationale behind the team’s selections and the reason for the Trust’s ongoing success.
Tech: a leopard that keeps changing its spots
Technology is an increasingly important sector in emerging markets and one in which the Trust has a significant investment, encompassing everything from chip manufacturers like Taiwan Semiconductor to Indian IT services businesses and Chinese electronic games companies.
Tech has been a big benefactor of the move online during the pandemic but Trust Investment Specialist Emily Whiting cautions against second guessing any kind of ‘new normal’.
“It has accelerated the adoption of certain trends, but you still need to be able to do it over the long term,” she says. “We need to be aware that a lot of these short-term growth numbers won’t be replicated going forward. It’s about whether these companies gain enough foothold in people’s lives to continue to do well. And we see that because we’re naturally looking for quality businesses.”
“If you can find a big business with economies of scale but also with barriers to entry they will do very well,” continues Whiting. She points to Chinese tech giant Alibaba as the perfect example of a business which benefits from market dominance and network effects while constantly innovating and adapting.
“It’s like the leopard that keeps changing its spots because it keeps finding new areas to go into and as its ecosystem broadens out there are more and more areas it then becomes useful in,” she comments. “Nowadays you can basically live your life through the Alibaba app1.”
While focused on the domestic Chinese market, Alibaba is already present in the wider world. Its electronic payment system Alipay is now accepted for purchases at duty-free counters all over the world. The company’s size and might make it a potential global player across e-commerce, electronic payment and cloud computing services.
Consumer: The secret sauce — great with watermelon!
The situation in the consumer sector is mixed, however, some standout consumer brands continue to do very well in the current environment. For the Trust, focusing on mass-market spending trends is key, especially aspirational brands in increasingly consumer-led markets like China.
Whiting flags Foshan Haitian Flavouring & Food Co as a great example of the kind of company the team rates in the sector. A Chinese A-Share – so listed onshore – is the number one soy sauce brand in China. As an aspirational product, it has plenty of potential to increase market share among China’s growing middle class.
“When people think about China, they think about trade wars, but this is a domestic story about soy sauce consumption,” comments Whiting. “It’s a premium brand, so it’s the sort of bottle you aspire to have on your table when you have people over to dinner. They serve it in upscale restaurants across China and therefore you want to be able to buy it to have at home. It illustrates perfectly the premiumisation strategy that exploits increasing consumer spending power.”
One intriguing fact to come out of the team’s research is that in southern China people put it on fresh fruit. “Apparently it goes very well on watermelon, which I would suggest is an acquired taste!”
Overall, Foshan Haitian is a strong example of how the Trust’s philosophy translates into consumer positions. It’s a low-cost purchase with growing sales, and it’s the dominant brand within a huge market.
Financials: Still where the money is over the long term
About one quarter of the Trust’s portfolio is in financials, which as a sector is currently working hard to support the global economy.
“We’re extremely confident about the long-term prospects of these businesses,” says Lead Portfolio Manager, Austin Forey. “But clearly when we get economic slowdowns, banks start to raise their provisions and that’s a drag on short-term profits and that’s been reflected in share prices.”
Despite the short-term noise, Forey and his team are confident the structural story will continue to be about a growing consumer class in emerging market countries making increasing use of financial products.
“What you always see is that people leverage their lives, they use loans, they use credit cards, they take out a mortgage and so on,” says Whiting.
The Trust remains invested in private sector banks in India, who harness technology to innovate, disrupt traditional banking models and continue to grow their market share at the expense of incumbent public sector banks.
“You can get your money out of an ATM using a thumb print, you can get a loan in 60 seconds, you can do 85 different transactions on your app with Housing Development Finance, which is a stock we hold,” comments Whiting. She says the trust might trim some financials slightly if the team thinks their opportunity has shifted but they won’t be pulling out of the sector.
Significantly, almost half of the Trust’s exposure to financials is in insurance and ‘diversified financials’ (essentially listed stock exchanges). This aids diversification — for example, a holding in the Hong Kong Exchange is benefiting from the current trend for Chinese firms re-listing there in reaction to ongoing trade tensions between China and the US.
Overall, what all of these investments have in common is a differentiated offering, strong fundamentals and huge potential for growth. For Forey and his team, that matters far more than region, country or sector. Now more than ever, investing in emerging markets requires experience and expertise for successful stock selection, but the potential long-term rewards are considerable.
1The securities named in this article are shown for illustrative purposes only. Their inclusion should not be interpreted as a recommendation to buy or sell
