Geopolitical conflict, rising oil prices and increasing expectations for artificial intelligence (AI) are driving some of the biggest impacts on global stock markets. But depending on the regional market and a portfolio’s positioning, the results can vary widely.
That’s been the case for the emerging Europe, Middle East and Africa (EMEA) region, which has recently underperformed the broader emerging markets and global equity indices. While technology stocks, especially those related to artificial intelligence (AI), have been powering some equity markets, the dominance of value- and income-oriented stocks in the emerging EMEA index has weighed on relative performance.
At the same time, the region’s strong exposure to rising oil prices is likely to translate into big gains in energy stocks—but in the near term, the potential for a new offering of shares in Saudi oil giant ARAMCO has weighed on energy sector valuations.
The portfolio managers of the JPMorgan Emerging Europe, Middle East & Africa Securities plc (the Company) are navigating these crosscurrents by focusing on high quality businesses with high expected returns that have the capacity to compound earnings and generate strong dividends over the long term. The portfolio being actively managed, its holdings, sector weights and allocations are subject to change at the discretion of the investment manager without notice.
Commodities offer diverse exposure
Emerging EMEA countries are rich in a variety of commodities, including oil and gas, platinum, gold and copper, each of which reacts differently to macroeconomic events and serves a different function in the portfolio.
For example, gold companies have been outperforming, given their appeal as a safe haven in volatile and uncertain times, which has benefited the portfolio’s position in Gold Fields, a South African gold miner. Kazatomprom, a Kazak supplier of uranium to global markets, is also proving to be a strong contributor to the portfolio’s income.
While the Company’s overweight position in energy stocks has recently detracted from performance, the portfolio managers continue to have high conviction in the sector as oil prices are likely to remain strong, potentially hitting over $100 per barrel. A new overweight position in Tupras, a Turkish oil and gas producer, has recently benefited the portfolio due to its defensive nature, ability to hedge currency risks and dividend distribution. Saudi’s ARAMCO, one of the largest oil companies, remains a top holding in the portfolio. ARAMCO’s low production costs and policy of passing unexpected oil price increases on to shareholders make it attractive.
Attractive valuations and dividends in financials
Banks and other financials remain large overweight positions, due to their low valuations and attractive dividends. The portfolio managers also believe banks are in a strong position to lead earnings growth going forward with elevated net interest margins. Banks’ roughly 40% weight in the index could boost the entire market and the portfolio could get a boost from high exposure to financials.
Against this positive backdrop, the Company added several new positions in financials including Poland’s Pekao and PKO, the National Bank of Greece, two Greek regional banks, Eurobank Ergasias Services and Piraeus, and added to existing positions in several other banks.
Active managers also have the ability to take positions outside of the index. The portfolio has several of these positions in financials with dividend yields of over 5%, including Halyk Savings Bank, a major Kazak bank, Bank of Georgia, a recent acquisition and one of Georgia’s largest banks, and JSC Kaspi KZ, a Kazak fintech company.
Greece’s potential vs. Turkey’s valuations
From a country perspective, the largest active positions in the portfolio are in Greece, where the portfolio managers have found a number of companies offering high income at reasonable valuations and expect the Greek market to continue to re-rate over time. Greek banks are likely to lead the way as they benefit from an advantageous funding arrangement provided by the European Central Bank that should lift valuations. Several Greek consumer companies also offer high dividends.
The Company’s underweight to Turkey has been a drag on relative returns recently. Several factors fueled the recent rally in Turkish stocks: a resurgence of interest from international investors building back positions and strong demand from local investors, who use equities to protect their savings from devaluation. However, after strong share price performance, some banks with negative real return on equity (ROE less CPI) look very expensive at over 2x book value. The Turkish market appears to reflect excessively bullish sentiment on the economy and market, especially given the potential for slower economic growth in response to tighter monetary policy.
Actively managing the portfolio
In a dynamic market like emerging EMEA, the portfolio managers continually evaluate current positions and new opportunities across the region. The Company participated in the initial public offering (IPO) of Parking, one of the largest suppliers of parking services in Dubai. This infrastructure play offers reasonably high and predictable income.
The portfolio managers also visited with management teams of many current holdings during three regional trips. Some of these discussions led to decisions to exit positions in several retail and telecom companies whose investment cases have either run their course or deteriorated.
The portfolio managers remain optimistic about the longer-term prospects of emerging markets in Europe, the Middle East and Africa. The region already offers equity investors compelling opportunities for growth, value and income, particularly across the large commodity and financials sectors. As these regional markets continue to rapidly expand and evolve they will present an even wider variety of companies and investment opportunities in the future.