If 2022 was a tough year for western economies, it was little better for global emerging markets, though for rather different reasons. But the past few months have provided cheering evidence that better times may lie ahead.

For Austin Forey, longstanding manager of the JPMorgan Emerging Markets Investment Trust (JMG), the headwinds facing emerging economies last year were twofold.

The first was the strength of the US dollar, which peaked at its highest value since the early 1980s relative to a basket of global currencies¹, before falling back sharply later in the year.

“A strong dollar has historically been bad news for us, first because it draws capital to the US and away from emerging markets, and secondly because higher interest rates in the US push them up everywhere else. Higher rates mean the cost of money rises, businesses borrow less and economies slow down,” Forey explains.

The second factor was the stifling impact of China’s zero Covid policy on its economy, particularly for outward-facing sectors such as travel, retail and hospitality. He points to fast food franchise and portfolio holding Yum China, whose share price remains well below its 2018 level.

The Chinese government’s effective reversal of its stance at the end of 2022 has resulted in a dramatic recovery for the market: for instance Tencent, JMG’s largest Chinese holding, saw its share price almost double between early November and the end of January.

As a consequence of these shifts in regard to both the US dollar and the Chinese economy, says Forey, “things were in a much better place going into 2023 than they were a year earlier”.

That boost to sentiment has been reflected in the trust’s performance, which has recovered its poise after a rare year of underperformance relative to the MSCI Emerging Markets index benchmark. Over the second half of 2022 JMG was ahead of its benchmark, calculated on a NAV Offer net of fees basis in GBP, and it has similarly outperformed into 2023 and over one, three, five, seven and 10 years on an annualised basis².

What’s underpinning this return to form? As Forey explains, it’s rooted primarily in the team’s decision to gradually increase exposure to China through most of 2022, having been pretty underweight for many years before that.

“That felt quite contrarian as the market continued to fall – and indeed for a while it felt like the wrong thing, as more or less every stock we added to immediately fell further,” he says. “But it does mean that we arrived at the low point in the Chinese market more or less neutral against the benchmark.”

By not being underweight, JMG has been able to keep up with the benchmark as it has been propelled upward by the impetus of Chinese recovery in the past four months or so.

JMG’s relative strength compared to the MSCI index was further bolstered by lack of exposure to the troubled Russian market, with only one Russian stock in the portfolio.

In sectoral terms, financials and resilient consumer staples were the biggest contributors to outperformance; the portfolio was held back by exposure to e-commerce businesses impacted by rising interest rates.

Forey points, for example, to the east European IT services company EPAM Systems, which was hard hit by the fact that a fifth of its workforce are based in Ukraine; remarkably, he says, the company managed to grow overall despite its challenges.

Notwithstanding 2022’s shift in the global economic climate and the setbacks encountered by many growth companies, however, JMG’s turnover has remained exceptionally low over the year. It’s a reflection of the fact that the team’s central tenet is to buy businesses with outstanding management teams that will deliver long-term compounding growth, and then hold them for a very long time indeed.

As Forey observes: “We’re always looking for the same kind of characteristics in businesses we buy; we tend to find them repeatedly in the same places and very rarely in many other places, so the portfolio doesn’t change much.

The one exception to that principle over the past year, as mentioned earlier, has been JMG’s enhanced exposure to China, with new holdings added and some existing ones increased.

Forey explains that this was a response to the fact that the market there had pretty much halved by late last year from its peak in early 2021, and as a consequence a number of attractive companies were available much more cheaply.

“We’re now in line with the index, but it’s really our stock selection within China that we hope will deliver results for shareholders from now on. It’s a significantly different position from the one we’ve held for many years,” he says.

In general, though, a low-turnover approach is a deliberate element of the way the trust is managed, for two reasons: first, it minimises transaction costs, and secondly it gives companies the time they need to deliver the compound returns for which they were selected in the first place.

Thus the most recent acquisition among JMG’s top 10 holdings was made in 2017; two of the 10 were bought in the 1990s. Indian financial services business HDFC is one of them, and it’s a great demonstration of the potential strength of this approach, the share price having gone up more than one hundredfold in the 25 years it has been in the portfolio.

That buy-and-hold strategy may be a relatively unusual one for most investors in fast-moving emerging markets, and of course not every stock delivers the consistent compounding growth Forey seeks. But over the long term, JMG has proved an extremely reliable route into emerging markets, and the signs are that that record will continue in 2023.

Find out more about the JPMorgan Emerging Markets Trust (JMG)

¹ Bloomberg, J.P. Morgan Asset Management, as at January 2023.
² J.P. Morgan Asset Management, as at January 2023. NAV is the cum income NAV with debt at fair value, diluted for treasury and/or subscription shares, with any income reinvested.

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
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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