Investment Trust Insights

Thirty Years of Emerging Markets: Lessons Learned and Future Insights

Austin Forey, portfolio manager, JPMorgan Emerging Markets Investment Trust, reflects on 30 years of investing in emerging markets and the lessons that have shaped his approach to investing.

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.

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.

Summary Risk Indicator:

The risk indicator assumes you keep the product for 5 year(s).­ The risk of the product may be significantly higher if held for less than the recommended holding period.

Investment Objective:

This Company aims to maximise total returns from Emerging Markets and provides investors with a diversified portfolio of shares in companies which the Manager 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. Gearing may magnify gains or losses experienced by the Company.

Risk Profile:

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 and income 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.

This is a marketing communication and as such the views contained herein do not form part of an offer, nor are they to be taken as advice or a recommendation, to buy or sell any investment or interest thereto. Reliance upon information in this material is at the sole discretion of the reader. Any research in this document has been obtained and may have been acted upon by J.P. Morgan Asset Management for its own purpose. The results of such research are being made available as additional information and do not necessarily reflect the views of J.P. Morgan Asset Management. 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. It should be noted that the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Changes in exchange rates may have an adverse effect on the value, price or income of the products or underlying overseas investments. Past performance and yield are not reliable indicators of current and future results. There is no guarantee that any forecast made will come to pass. Furthermore, whilst it is the intention to achieve the investment objective of the investment products, there can be no assurance that those objectives will be met. J.P. Morgan Asset Management is the brand name for the asset management business of JPMorgan Chase & Co. and its affiliates worldwide. To the extent permitted by applicable law, we may record telephone calls and monitor electronic communications to comply with our legal and regulatory obligations and internal policies. Personal data will be collected, stored and processed by J.P. Morgan Asset Management in accordance with our EMEA Privacy Policy www.jpmorgan.com/emea-privacy-policy. Investment is subject to documentation. The Annual Reports and Financial Statements, AIFMD art. 23 Investor Disclosure Document and PRIIPs Key Information Document can be obtained in English from JPMorgan Funds Limited or at . This communication is issued by JPMorgan Asset Management (UK) Limited, which is authorised and regulated in the UK by the Financial Conduct Authority. Registered in England No: 01161446. Registered address: 25 Bank Street, Canary Wharf, London E14 5JP.

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