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Get quality growth with JPMorgan Emerging Markets

JPMorgan Emerging Markets has delivered strong returns from a portfolio of quality growth stocks.
June 7, 2018

Emerging markets continue to offer stronger growth prospects than developed markets. The IMF World Economic Outlook forecasts 4.9 per cent gross domestic product (GDP) growth from emerging economies this year, compared with 2.5 per cent for advanced economies, while analysts at Pictet Asset Management expect emerging markets to continue growing over the next five years, with average GDP growth of 4.6 per cent a year, compared with 1.6 per cent for developed markets.

IC TIP: Buy at 866p
Tip style
Growth
Risk rating
High
Timescale
Long Term
Bull points

Emerging markets growth potential

Tech exposure

Good performance

Experienced manager

Bear points

Higher risk

Emerging market technology companies are also increasingly threatening Silicon Valley’s dominance of the global tech sector, according to Luca Paolini, chief strategist at Pictet. He says: “Emerging economies are no longer content to be limited to assembling American-designed and developed components. Increasingly, they will create the intellectual property that runs the world. Emerging market [tech] companies' earnings are expected to grow 22 per cent over the next three to five years, outpacing the 16 per cent expected from their developed-market counterparts.”

One way to gain exposure to the potential growth on offer, particularly tech companies, is via JPMorgan Emerging Markets (JMG). Information technology is the investment trust’s second-largest sector and makes up 30 per cent of the portfolio – slightly more than its benchmark, the MSCI Emerging Markets index, which has 27 per cent in this area. Chinese internet business Tencent (HKG:700) is the trust’s largest holding, representing a punchy 6.5 per cent, and the top 10 also includes another Chinese giant Alibaba (US:BABA), as well as Taiwan Semiconductor (Tai:2330).

The trust also benefits from the stability of a longstanding and highly experienced manager, Austin Forey, who has been at the helm since 1994. Mr Forey has personally achieved a good performance record over a long period, delivering a cumulative total return of 82.4 per cent over 10 years across his funds, compared with 66.2 per cent for a composite of his peer group, according to FE Analytics.

JMG has delivered good long-term performance too, outperforming its benchmark and peer group over three and five years. The trust is among the best performing trusts in the Association of Investment Companies (AIC) Global Emerging Markets sector over one, three and five years.

Mr Forey aims to find quality growth stocks within emerging markets that have durable competitive advantages. While he considers valuation, this is secondary to a company’s growth potential. And long-term returns are expected to come from increasing earnings and dividends rather than a sharp change in valuation. Even without such a focus, emerging market stocks do appear undervalued so may offer a re-rating. The cyclically-adjusted price/earnings ratio (CAPE) for emerging market companies is currently 13.4 versus a long-term average of 15.8, and it is the only region below its long-term average. 

He chooses stocks on their individual merits, with country and sector overweights emerging as a result. In addition to technology companies, the trust has a high weighting to financials, which is the portfolio’s largest sector at 34 per cent – 10 percentage points more than the index. China is the trust’s largest individual country exposure, followed by India. However, India represents the highest overweight, with an allocation of 21.4 per cent, compared with just 8.5 per cent in the index.

JMG currently stands on a discount of 13.1 per cent, which is in line with its long-term average and marginally above the average for other emerging market trusts. Continued good performance may result in a narrower discount.

Although emerging markets offer good growth prospects compared with developed markets, they are more volatile, with typically greater political and corporate governance risk. Investors can also be less tolerant, and react quickly and negatively to macro changes. But Mr Forey’s two decades of experience means he should be well-placed to cope with any potential volatility.

So if you have a long-term horizon and can therefore ride out the inevitable peaks and troughs, JPMorgan Emerging Markets’ experienced manager, quality focus and exposure to high-growth areas makes it an attractive option. Buy. EA.

 

JPMorgan Emerging Markets (JMG)

PRICE866pGEARING0%
AIC SECTOR Global emerging marketsNAV986.0p
FUND TYPEInvestment trustDISCOUNT TO NAV13.1%**
MARKET CAP£1.07bnYIELD1.3%
No OF HOLDINGS60*ONGOING CHARGE1.07%**
SET UP DATE16/07/1991MORE DETAILShttps://am.jpmorgan.com
MANAGER START DATE01/06/1994  

Source: Winterflood Securities as at 04.06.2018, *JPMorgan Asset Management as at 31.03.2018, **Association of Investment Companies

 

 Performance   
Fund / benchmark1 year share price  return (%)3 year cumulative share price return (%)5 year cumulative share price return  (%)
JPMorgan Emerging Markets94644
AIC Global Emerging Markets sector32219
MSCI Emerging Markets index93431
    

Source: FE Analytics as at 05.06.2018

 

Top 10 holdings as at 30.04.2018 (%)

Tencent 6.5
Housing Development Finance 5.5
Taiwan Semiconductor Manufacturing 5.2
IndusInd Bank 4.6
Alibaba 4.5
AIA Group4.0
Ping An Insurance 3.3
Tata Consultancy Services 3.1
Epam 3.1
Clicks 3.0

Source: JPMorgan Asset Management

 

Sector breakdown as at 30.04.2018 (%)

Financials34.0
Information technology29.6
Consumer staples17.7
Industrials7.4
Consumer discretionary6.6
Materials3.1
Energy1.4
Other and Cash0.2

Source: JPMorgan Asset Management