In the current environment an approach based on proven experience and expert analysis of the growth potential of individual stocks is essential for investing successfully in emerging markets.
To the uninitiated, emerging markets may seem a difficult area in which to invest in the second half of 2020. But despite concerns that COVID-19 fallout has slowed capital flows to emerging markets, long-term investors focusing on the right portfolio of stocks still have reasons to be positive.
Aside from the effect of the pandemic, concerns around US-China relations, falling earnings and currency weakness may be off-putting for investors, but it’s important not to let the short-term noise drown out medium to longer-term thinking.
A clear focus on evidence-based stock selection, targeting strong fundamentals and long-term growth potential, will continue, in our opinion, to drive gains. With veteran Lead Portfolio Manager Austin Forey and his team at the helm, the JPMorgan Emerging Markets Investment Trust continues to make the most of the long-term potential the best emerging market companies have to offer.
The changing face of Emerging Markets
If you still think of emerging markets as being about commodities, banks and property companies, then think again. While a country like China once based its economic growth model on a capital-intensive, infrastructure-driven model, the structure of emerging markets has transformed over recent years.
‘People who still think about EM as a commodity-dominated asset class are very much stuck in the last decade,’ says Investment Specialist Emily Whiting. ‘These days commodities are barely touching double digits as a percentage of the Emerging Markets Index; I remember back in 2007-2008 they made up around a third of it.’
‘There’s been a very significant change in the past 10 years towards businesses which create value without needing capital to do so,’ says Whiting. ‘One of the most interesting things about emerging markets today is that the kinds of business models that have been so successful for shareholders in the US over the last 20 or 30 years are now much more widespread in emerging markets. For example, social networks, consumer brands, software and e-commerce companies.’
The JPMorgan Emerging Markets Investment Trust portfolio is notably and deliberately tilted towards these types of low capital intensity, high-growth businesses which benefit from a huge potential market.
Confidence born of experience
The Emerging Markets Trust team has a wealth of experience in the sector – in particular, Forey, who has been with the Trust since the mid-nineties and so has weathered enough storms to view current events calmly. Whiting sees that depth of specific emerging market experience as hugely important.
‘If you have emerging markets as an offshoot of global equities then the minute all these analysts and portfolio managers move into EM they get absolutely shocked by double-digit declines in a day, which we’re quite hardened to. Thankfully they’re not too frequent but the increased volatility comes as part of the asset class.’
The key as a long-term investor is having the experience to look through the market noise, to focus on fundamentals not headlines. That results in low turnover rather than the portfolio being frequently shuffled around or changed.
‘There are times the market will sell down everything in a country just because of the country it’s in. But if you believe that you’ve bought good quality businesses, if you trust their management, if they have a robust balance sheet, and if they have a superior product – then, sitting on your hands is the best course of action.’
As a result, the Emerging Markets portfolio changes little, and, as far as Forey is concerned, that’s a good thing. In a tumultuous year, stock turnover is in single digits, while performance remains strong, with excess returns of around 3% above the Index in the Trust’s fiscal year to the end of June 2020.
Eyes and ears on the ground
With analysts and portfolio managers largely unable to travel during the pandemic, the advantage provided by the Trust’s 100-strong global team is more obvious than ever. In a rapidly changing environment, the ability to access granular firsthand insight is invaluable. The Emerging Markets team collectively speaks over 20 different languages, conducting around 5,000 face-to-face meetings a year in mother tongue.
However, it’s not only those formal meetings which can make the difference – being immersed in the local culture can be just as valuable, as Whiting explains.
‘Out of any asset class the breadth and the cultural differences across emerging markets make it so important not to just be sat behind a Bloomberg terminal looking at numbers. Having people on the ground in the likes of Shanghai and Taipei means we see first-hand the pick-up in traffic, or queues for restaurants again.’
The weak get weaker, the strong get stronger
The Trust team is fully conscious that not all in emerging markets is rosy, with those countries having weak fundamentals to start with being weakened further by the current crisis.
‘That’s something we have to be aware of when we think about markets and growth rates for individual companies – it’s very important to understand what the drivers are,’ says Forey.
However, as Whiting points out, ultimately for the Trust, it’s not about regions, countries or even sectors but about individual businesses.
‘More than anything, in this sort of situation the strong will get stronger,’ says Whiting. ‘If you’ve got companies with money behind them, with a strong balance sheet, with a clear, differentiated offering, you will do well.’
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