Austin Forey, Manager, JPMorgan Emerging Markets.
Investors have to put today’s market nerves into historical context. Unlike the 1990s, today we have floating currencies in many more emerging markets and hold much larger foreign exchange reserves. Having floating rather than fixed rate currencies acts like a pressure valve on emerging markets – it means that tension gets released on a daily basis and in reaction and alignment to the world’s major currencies. This may mean sharper daily volatility but it creates continual rebalancing instead of perpetuating a broken system.
It’s a big mistake to take a blanket approach to emerging markets and tar them all with the same brush. We’re talking about a part of the world that represents 80% of the world’s population and 50% of its GDP, so of course there are huge variations, geographically, culturally and economically. That is why you see active management approaches still so prevalent in the market. Some areas have been punished on a price basis simply by virtue of their locations, whereas others carry significantly more risk, so you have to be selective.
When pessimism about an asset class is this strong, usually that is a compelling opportunity to buy at an attractive price if you have a long-term time horizon (5+ years). While caution is merited – cheap assets can always get cheaper, after all - it is worth remembering that beyond the noise there is a compelling case for higher risk emerging markets. There is always the potential for downside but we are in a historically cheap zone.
Within the JPMorgan Emerging Markets Investment Trust, our positioning is driven by bottom up stock decisions. We look to add value primarily through fundamental stock selection based on local knowledge and frequent company contact. The two pillars of our investment approach are understanding and valuation. We develop a deep understanding of companies over long periods through extensive discussions with management teams. We then determine the valuation of growth prospects that our understanding leads us to expect. Our experienced Emerging Markets Equity Team consists of 38 dedicated investment professionals, with an average of over 12 years’ experience in the asset class. We combine the global perspective of our senior GEM portfolio managers, who have invested together through many business cycles, with the sector expertise of our analysts and local market knowledge of our regional portfolio managers.
Despite the broader global macro environment, we have not made big changes to asset allocation. We continue to be underweight in current account surplus markets of Korea and Taiwan, this is unlikely to change as we just don’t find the types of businesses we want to own in these countries, notably long term growth opportunities are less plentiful. In contrast, with emerging markets currencies in generally looking cheap (to our long term fair value), we remain overweight particularly in countries like India, South Africa and Brazil. Changes made on an individual stock level are driven by our view on their economics, duration and governance and through due diligence conducted by our team of analysts. By sector, we have a consumer bias and are anti-cyclical – meaning underweights in Energy and Materials.
It is important in the current environment, for investors to remember the long term story. Emerging Markets is more sentiment and confidence driven than other asset classes. Right now, buying emerging markets is neither obvious or popular – but buy before it is obvious, because the obvious thing is almost always wrong!