Emerging market investors can be well served by a total returns approach focusing on a reliable income element as well as capital growth. The strong performance record for JPMorgan Global Emerging Markets Income Trust (JEMI), with outperformance of the benchmark MSCI Emerging Markets index over one, three, five, seven and 10 years¹, is testament to that approach.

Through its bottom-up income and growth lens, JEMI seeks out the highest quality dividend-paying businesses across all emerging markets while also keeping a close eye on valuations. 

Powerful combination of income and growth

Moreover, by investing right across the yield spectrum, the managers are able to boost income from the portfolio with around 20% of high-yield (6% plus dividend yield) holdings, while at the same time enhancing capital and dividend growth potential through the 20% or so of stocks paying under 3%.

“The lower the yield, the higher our conviction of the company’s ability to grow dividends over time needs to be,” explains JEMI co-portfolio manager Isaac Thong.

That flexibility to embrace both generous payers and those at the start of their dividend journey, across all emerging markets and sectors, is the scaffolding for a highly diverse yet high-conviction portfolio. Given the enormous variation between different emerging economies, it’s a big plus.

At the moment, says Thong, there is somewhat less variation than usual in allocations to different countries, reflecting the fact that “investment opportunities are increasingly bottom-up because of the broad downturn in emerging economies”.

Changes to market positions: China and South Korea

The managers have been adding to previous underweights China and South Korea over the year, bringing them up to roughly in line with the benchmark.

In South Korea the attraction is structural improvement, with corporates making a concerted effort to return more capital to shareholders. Thong gives the example of Korean banks, who have been gradually raising their payout ratios from around 20% to over 30%.

He adds that the banks “have also become a lot more conservative around foreign mergers and acquisitions,” which the JEMI managers regard as a sign of the improving quality of management teams.

China’s weighting has crept up for rather different reasons. Thong recently returned from his first visit in three years; he says that in stark contrast to the previous time, the corporate mood in China is now quite downbeat, primarily over political uncertainty emanating from central government.

“Because of this domestic uncertainty, Chinese companies are just not willing to invest at the moment, and it also explains much of the negative consumer sentiment,” he remarks.

Nonetheless, Thong sees several reasons for optimism. First, policy changes are already being enacted: “We’re already witnessing incremental positive news flow around policy in the property, internet, education and tourism sectors.”

Secondly, company valuations are heading toward 10-year lows, in his opinion pricing in geopolitical risks and those of slower growth. Importantly for JEMI, there’s also a marked shift in companies’ willingness to pay out to shareholders. “The opportunity for income in China is actually increasing as far as we’re concerned,” he says.

Interestingly, however, many of the stocks that have recently detracted most from JEMI’s performance have been Chinese. As Thong explains, the portfolio holds mainly financials and consumer stocks in China, both of which have struggled in the short term.

The bank holdings tend to be high-quality businesses and remain in the JEMI portfolio for their long-term potential, but their exposure to the property sector is causing them problems at present.

However, Thong believes consumer stocks - “consumer champions with real pricing power, and also exporters” – are now looking very attractive, and the managers have been adding to holdings. “The market has forgotten about how well they’ve performed and they’ve sold off with the wider sell-off,” he adds.

What about India and Taiwan?

The one outlier in terms of country allocations is India, at almost 10% below the benchmark weighting. While India continues to enjoy impressive economic growth rates, it’s a difficult place for income-seekers, because companies are reinvesting all their profits to expand further rather than paying dividends. At the same time, company valuations are looking increasingly rich.

“The best dividend businesses simply don’t exist in India; it’s a very growth-oriented market and we’re likely to remain underweight for a while yet, but we’re still on the lookout for opportunities there,” Thong observes.

And they do crop up from time to time. A recent addition to the portfolio is HDFC Bank; although its dividend yield is currently only 1.3%, the team are confident it’s well placed to deliver earnings and dividend growth over the long term.

Of course, cyclical trends can disrupt performance in the short term: the JEMI portfolio’s underweight to India has had some impact, as has its exposure to Taiwanese tech stocks such as Wiwynn. “In 2022 they had a difficult time and accumulated a lot of inventory, but we like them on a structural basis,” says Thong. In fact, Taiwan tech has bounced back (in part because of the Artificial Intelligence story that has grabbed headlines), making the biggest contribution to the portfolio’s performance year to date.

Clearly, the portfolio managers’ ability to invest across a broad range of emerging market countries and market sectors, capitalising on opportunities they identify while managing the balance of high-yielding and growth stocks has made a positive contribution to results. Overall, there is powerful evidence that JEMI’s long-term, total returns, quality-focused perspective really can pay dividends.

¹ Data as at 31 October 2023. Performance data has been calculated on a NAV Offer net of fees basis in GBP. Past performance is not a reliable indicator of current and future results. The performance of the company's portfolio, or NAV performance, is not the same as share price performance and shareholders may not realise returns which are the same as NAV performance.

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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:

Aims to provide a dividend income, together with the potential for long-term capital growth from diversified portfolio of emerging markets investments. The Company will predominantly invest in quoted companies although, where appropriate, it may invest in other types of securities. The Company has the ability to use borrowing to gear the portfolio to up to 20% of net assets where appropriate.

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.
• This Company may invest in non-investment grade bonds which increases the capital risk and may have an adverse effect on the performance of companies which invest in them.
• 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 China-Hong Kong Stock Connect program which is subject to regulatory change, quota limitations and also operational constraints which may result in increased counterparty risk.
• As the portfolio is primarily focused on generating income, it may bear little resemblance to the composition of its benchmark.

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 www.jpmam.co.uk/investmenttrust. 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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