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JPMorgan Global Emerging Markets Income is a good way to pick up emerging markets' yields

JPMorgan Global Emerging Markets Income Trust is a good way to tap into dividend-paying stocks in emerging markets
October 13, 2016

Emerging markets have enjoyed a reversal in fortune this year following slower-than-expected interest rate hikes in the US, a bounce back in commodities and political change in Latin America. This turnaround has partly been driven by investors going back into emerging markets as an alternative to low-yielding assets in developed markets.

IC TIP: Buy at 125.3p
Tip style
Income
Risk rating
High
Timescale
Long Term
Bull points
  • Good performance record
  • Attractive yield
  • Low gearing
  • Overseas earnings boost
Bear points
  • Discount has been wider

A way to get exposure to higher-yielding stocks in emerging markets is IC Top 100 fund JPMorgan Global Emerging Markets Income Trust (JEMI), which has an attractive yield of about 4 per cent. It has also outperformed its benchmark, the MSCI Emerging Markets Index, in every calendar year since its launch in 2010, with the exception of 2015.

The trust's net asset value (NAV) fell more than 20 per cent in 2015, in contrast to its benchmark which fell just under 10 per cent. An overexposure to some of the weakest emerging market currencies hurt performance.

But JPMorgan Global Emerging Markets Income has rallied strongly this year as market sentiment has shifted away from quality, bond-like stocks towards higher-yielding equities, which its managers favour. Over the past year the trust has delivered a share price return of 40.8 per cent compared with its benchmark's return of 35.4 per cent. It has also beaten the index over five years, generating a share price return of 54.9 per cent compared with 46.5 per cent.

"We like JPMorgan Global Emerging Markets Income's management team, its track record and the fact it is using a moderate amount of leverage (debt) in an improving market," comment analysts at broker Stifel. "The trust has rebounded strongly, following last year's disappointing performance which was due to style issues."

The trust aims to provide a dividend income and the potential for long-term capital growth. About 60 per cent of the portfolio is in stocks that yield 3 to 6 per cent, with 20 per cent in ones that yield above 6 per cent, and the remainder in stocks yielding under 3 per cent. Three markets account for over half of the trust's investments: Taiwan (21.4 per cent), China (17.9 per cent) and South Africa (13.4 per cent).

Lead manager Omar Negyal is underweight the benchmark on China and has recently been selling Chinese financials due to concerns that the country's debt bubble could weigh on these stocks' dividend sustainability.

But financials are the trust's largest sector exposure, and Mr Negyal has recently added Moscow Exchange (MCX:MOEX) and Bolsa Mexicana (BOLSAA:MEX) because he thinks stock exchanges offer attractive free cash-flow generation and a high return on capital.

The trust is able to take on up to a maximum of 20 per cent gearing (debt) but this currently stands at about 6 per cent.

Currency movements hurt the trust's performance in 2015 but the recent fall in sterling could prove beneficial as overseas earnings will be worth more when converted back into sterling. The sharp decline in sterling may also enable JPMorgan Global Emerging Markets Income to increase its dividend next year, add analysts at Stifel.

However, other factors could have a negative impact on the trust's returns, such as a hike in US interest rates or a strengthening dollar, which would result in money being pulled out of emerging markets.

The trust is also trading on a narrow discount to NAV of 0.4 per cent in contrast to much wider levels over the past year, so it is not at its cheapest.

However, the trust consistently traded at a premium to NAV prior to 2015 and it could return to these levels in the near future given the strong demand for yield.

So, if you want to reap the equity yields on offer in emerging markets via a fund with a good track record, now might be a good time to pick up JPMorgan Global Emerging Markets Income Trust. Buy. EA

JPMORGAN GLOBAL EMERGING MARKETS INCOME TRUST (JEMI)
PRICE:125.3pGEARING:

5.9%*

AIC SECTOR: Global Emerging MarketsNAV:125.7p
FUND TYPE:Investment trustPRICE DISCOUNT TO NAV:0.4%
MARKET CAP:£368.4mYIELD:3.9%
No OF HOLDINGS:67*ONGOING CHARGE:1.24%
SET-UP DATE:29 July 2010MORE DETAILS:https://am.jpmorgan.com/gb/en/asset-management/gim/welcome

Source: Winterflood, as at 11/10/16 & *JPMorgan

 

Performance

6-month share price return (%)1-year share price return (%)3-year  cumulative share price return (%)5-year cumulative share price return (%)
JPMorgan Global Emerging Markets Income Trust36.340.817.554.9
MSCI Emerging Markets Free Index28.235.425.546.5

Source: Winterflood, as at 11/10/16

 

Top 10 holdings as at 31/08/16 (%)

Taiwan Semiconductor ADR 3.6
China Mobile 2.8
Vanguard International Semiconductor 2.6
Kimberly-­Clark de Mexico 2.6
Banco Santander­-Chile ADR 2.5
Ambev ADR 2.4
BB Seguridade Participacoes 2.4
Lukoil ADR 2.2
Delta Electronics 2.2
Fuyao Glass 2.2

Source: JPMorgan

  

Sector breakdown, as at 31/08/16 (%)

Financials 24.0
Information technology 16.6
Consumer staples 15.0
Telecommunication services 12.7
Consumer discretionary 9.3
Materials5.3
Energy 4.6
Utilities 4.3
Industrials3.7
Health care 1.7
Other2.8

Source: JPMorgan

 

IC Tip Rating

Tip StyleIncome
Risk RatingHigh
TimescaleLong term