Reflecting on nearly three decades of investing in emerging markets, I am struck by the vast transformations, and the enduring lessons that have shaped my approach to investing. When I started working on the JPMorgan Emerging Markets Investment Trust in 1994, the concept of emerging markets was a niche, almost esoteric, part of the investment landscape. Today, it is an essential component of global finance, and understanding this evolution is key to navigating the future of investing in these dynamic regions.

The Evolution of Emerging Markets

In the early 1990s, the notion of investing in emerging markets was met with scepticism. Many of my colleagues were puzzled by my decision to venture beyond the USA or Western Europe. Back then, investing in Spain was considered adventurous, let alone in markets like Thailand or Malaysia, the latter then being the largest country in emerging markets indexes.

When I began, China was virtually non-existent on the investment radar, and India was only beginning to open up, burdened with significant restrictions. Now, these countries are pivotal players in the global economy. The accessibility of these markets, coupled with their inherent economic potential, has firmly established emerging markets as a mainstream investment class.

Economic growth doesn’t automatically mean superior returns

One of the fundamental lessons from my experience is that rapid economic growth in emerging markets does not automatically translate into superior investment returns. While the demographic and economic growth narratives are compelling, the reality is more nuanced. The key to successful investing lies in focusing on companies rather than economies. Return on capital, business models, and management quality are far more critical determinants of long-term investment success than mere GDP growth rates.

Consider the example of the United States. Investors are attracted by the presence of high-quality companies that generate robust returns on capital. Similarly, in emerging markets, there are numerous globally competitive businesses that thrive even in slower-growing economies. Financial services are a prime example where a growing economy can be beneficial, but the overarching principle remains that quality and sustainable business practices are paramount.

The Importance of Valuations and Cycles

Another crucial lesson is the significance of valuations. The performance of the Chinese market over the past couple of years serves as a stark reminder. The market's peak in early 2021 was followed by a substantial decline, not because of a collapse in underlying profits, but due to a contraction in valuations. This underscores the importance of not overpaying for growth. While high-quality companies are essential, the price you pay for them can determine your investment outcomes over the long term.

Similarly, the Indian market, despite its impressive economic growth, presents pockets of high valuations. While some sectors appear richly valued, others remain reasonably priced. The critical task is to identify these opportunities and remain disciplined in investment choices. This disciplined approach has been central to our long-term performance.

Taking a long-term view

We maintain a notably low turnover within our trust, typically around 10% or less annually. Some people criticise this but I find such critiques rather surprising. Our approach involves holding stocks for extended periods, averaging perhaps a decade or more. In reality, some investments remain in our portfolio much longer, ideally indefinitely. There are stocks that have been with us continuously for over 20 years.

Navigating the Future

Looking ahead, the landscape of emerging markets continues to evolve. The geopolitical environment, particularly concerning China, presents new challenges. However, as an active investor, challenges bring opportunity.

As I reach 30 years with the JP Morgan Emerging Markets Investment Trust, I remain optimistic and excited about the sector. Investing in quality companies with sustainable business models and prudent valuations have always been, and will remain, our guiding lights.