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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.
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.
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.
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.
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.
The companies above are shown for illustrative purposes only. Their inclusion should not be interpreted as a recommendation to buy or sell.
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:
The Company aims to maximise total return to shareholders from a diversified portfolio of investments in Emerging Europe (including Russia), Middle East and Africa.
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. The Company typically invests in a concentrated portfolio of investments and should a particular investment decline in value, this will have a pronounced effect on the overall value of the Company. 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.
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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