Markets as a whole have not rewarded investors in emerging economies over the past two years. But that blanket statement masks some large disparities between different countries, and between different sectors within economies.

As Austin Forey, who runs the JPMorgan Emerging Markets Investment Trust (JMG), explains: “China has been very weak over the timeframe we’re looking at, and that’s important because it’s a large part of our opportunity set. But the big declines in China’s index have offset very reasonable returns from other emerging markets.” 

In practice, though, the short-term macro backdrop is a secondary consideration for Forey. His main focus is very much on the bottom-up identification of individual stocks that meet the trust’s selection criteria and will deliver long-term outperformance. 

“We’re trying to find great businesses across the market cap spectrum that can compound their value – and hence their shareholder returns – for a long, long time,” he adds. 

Target businesses have characteristics such as good governance, strong cash generation and great returns on capital. The best may remain in the JMG portfolio for 20 or 30 years, gradually strengthening their position and growing organically to gain a place in the top 10 holdings as they outperform. 

Thus, seven of the top 10 biggest holdings have been in the portfolio for at least 10 years, with the top two – Taiwan Semiconductor and India’s HDFC Bank – both added back in the 1990s. 

Nonetheless, periods of disappointment are inevitable in the shorter term, and Forey readily acknowledges that JMG’s performance over the latest full financial year (to end June 2023) has been “mediocre”. The trust flatlined over the financial year in both share price and net asset value terms, though it did outperform the index; in the subsequent quarter it slipped marginally into negative territory.

Focus on consumer goods, financial services and technology stocks

In part that’s a reflection of the trust’s firm focus on “great businesses” for long-term rewards. Although JMG has a ‘go-anywhere’ mandate, Forey and his team tend to invest in very specific parts of the market, because that’s where they find the kind of opportunities they’re looking for. But different sectors may face very different shorter-term fortunes.

To put that into context, over a third of the portfolio is in consumer goods, with a further 25% plus in financial services and a similar amount in technology stocks; each has been subject to different macro trends and pressures over the last two years. 

Financial services remains an attractive growth area across emerging economies, with ownership of bank accounts and particularly credit cards still low compared with developed countries. JMG has exposure not just in India but also in Hong Kong, Indonesia, Latin America and South Africa. 

As far as technology is concerned, JMG owns both hardware producers (in Taiwan and South Korea) and software companies, primarily in India, but also in Latin America and Eastern Europe. All are export-driven, so the global slowdown in demand has significantly impacted operating profits, but Forey believes we are now close to the trough of the cycle and “there is every expectation of a reasonable and sustained rebound”. 

He also makes the point that the growth of artificial intelligence is “more of an emerging markets tech story than you might think”, given the global predominance of emerging market hardware production and software developers – which bodes well for future trends for the sector. 

Around 50% of JMG’s consumer holdings currently are Chinese, and many of them (particularly higher-end brand names, for example soy sauce producer Foshan Haitian) have been squeezed by negative Chinese consumer sentiment. There has been better performance from Latin American, Indian and South African holdings. 

Importantly, although JMG’s share performance has flatlined, on the whole the portfolio businesses have performed robustly. Earnings grew across the consumer goods and financial services holdings by around 9% in US dollar terms over the financial year, though technology earnings declined slightly in the face of global slowdown in demand. 

Overall, says Forey, earnings growth was up around 4%, compared with a decline of 20% for the benchmark MSCI Emerging Markets Index. “We take solace from that, because it means the businesses we own are still growing despite the changing economic environment,” he observes. 

What lies ahead for emerging markets?

The next 24 months are shaping up to be politically pretty lively, with ongoing turmoil in the Middle East, tensions running high between the US and China over Taiwan, and Indian, UK and US elections (of which the latter are arguably the most important for emerging economies). 

Forey doesn’t attempt to call any conclusions, but he highlights the potential for “irrational outcomes” in geopolitics. However, he stresses: “The best defence is always to invest in businesses with strong finances, strong competitive advantages and ideally low valuations, that can withstand whatever is thrown at them.” That’s a strategy followed by JMG. 

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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:

This Company aims to maximise total returns from emerging markets and provides investors with a diversified portfolio of shares in companies which the manager believes 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 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.

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