What are the factors supportive of EM and Asia Pacific equities
Since 2025, EM have benefitted from a strong macro backdrop, making bottom-up stock selection more rewarding.
- A weaker US dollar.
- Continued government spending.
- A multi-year artificial intelligence (AI) and infrastructure investment cycle.
- China has shown early signs of easing a long deflationary period.
- Outside China, some EM economies are seeing higher inflation that supports industrials, defense, and commodities.
No doubt, the Middle East conflict is a near-term risk, especially for energy importers. Even so, global markets have mostly looked through near-term volatility as long as the AI cycle remains intact.
We believe our EM strategy, JPMorgan Global Emerging Markets Research Enhanced Index Equity Active UCITS ETF (JREM), is well-positioned in this environment. JREM aims to exploit stock-specific insights in EM while maintaining index-like characteristics through robust risk management, leveraging in-depth fundamental research and a long-term, fundamentals-based valuation framework.
Reinforce, refine and reposition
Our team has taken additional steps to reinforce our resources, refine our processes, and reposition portfolios while maintaining the core of our research and portfolio management approach. This included significant progress in rolling out “Industry Frameworks” to anchor long-term forecasts and systematically tracking investment thesis signposts through “Predetermined Game Plans” to build conviction and inform position sizing.
We also placed greater emphasis on analyst funds in our Research team’s end-of-year metrics, prioritising actionable research ideas.
AI: Semiconductor exposure and valuations
The tech sector has been a material contributor to the strategy’s excess return.
To preserve sector neutrality, excess exposure in a large benchmark constituent was reallocated to other technology holdings in the two markets.
Based on fundamental research, we increased allocations to a basket of supply-chain and adjacent beneficiaries that provide similar thematic exposure. These proxy positions typically carry higher beta and, year-to-date, has materially supported portfolio returns.
As shown, the chart on the left compares the valuations of the tech sector in the US and Asia. While the chart on the right illustrates the share of semiconductor and memory production by market – highlighting that Asia’s leadership in tech hardware are not yet fully reflected in relative valuations.
We have been actively managing the risk associated with high performers by taking gains in winners and adding to laggards where conviction and valuation continue to be supportive.
The key activity has been balancing valuation with opportunity — rotating out of strong winners and keeping exposure to names where we have strong conviction and are finding better value — to ensure we are not taking unintended stock-specific risk.
Risk management and oversight are integral to the process, and we ensure that strong performers remain within stock limits and within risk control bands to avoid any unintended risks.
Conclusion
Overall, we believe JREM is well-positioned for a high-dispersion market, with disciplined risk management and strong stock selection to generate alpha.