WHY YOU SHOULD CON­SIDER EMERG­ING MAR­KETS FOR THE LONG TERM TO­DAY

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The term “emerg­ing mar­kets” is used to de­scribe de­vel­op­ing economies across the world. These in­clude some of the most pop­u­lous na­tions, such as China, In­dia, Brazil and Rus­sia as well as smaller coun­tries in­clud­ing Mex­ico, South Africa and Saudi Ara­bia.

These fast-grow­ing re­gions are driv­ing global growth at present and look set to be the lead­ing eco­nomic pow­er­houses of to­mor­row. Mean­ing to­day’s in­vestors should not over­look emerg­ing mar­kets.

These coun­tries may be di­verse yet they typ­i­cally ex­hibit at­trac­tive de­mo­graph­ics and a grow­ing “mid­dle class” which are the key driv­ers be­hind their eco­nomic growth.

The fig­ures speak for them­selves. Ac­cord­ing to J.P. Mor­gan As­set Man­age­ment, emerg­ing GDP in emerg­ing mar­kets is es­ti­mated to be 4.5 per cent in 2018; this com­pares to just 1.75pc in the US and 1.25pc in the UK.1

These are ma­te­ri­ally im­por­tant mar­kets which al­low in­vestors to di­ver­sify their port­fo­lios and ac­cess more sus­tain­able, long-term growth op­por­tu­ni­ties ver­sus de­vel­oped mar­kets peers.

WHY IN­VEST IN EMERG­ING MAR­KETS NOW?

Emerg­ing mar­kets have ma­tured in re­cent years and now of­fer a dif­fer­ent in­vest­ment en­vi­ron­ment to that of the 1990s and early 2000s.

Po­lit­i­cal and eco­nomic re­forms have helped build stronger and more sta­ble economies, with larger re­serves and far less debt.

A more ma­ture cor­po­rate mar­ket is re­flected in the fact that far more com­pa­nies in these re­gions now share prof­its with in­vestors via div­i­dends payments. Emerg­ing mar­kets to­day have out­per­formed many Euro­pean and US mar­kets, where growth has slowed in re­cent years. Val­u­a­tions are also look­ing at­trac­tive rel­a­tive to long-term av­er­ages, as short­term mar­ket move­ments mean that share prices and mar­kets have had a chal­leng­ing pe­riod in 2018 but fun­da­men­tals re­main com­pelling.

MANAG­ING EMERG­ING MAR­KET RISKS

This is not to say that in­vest­ing in emerg­ing mar­kets is not with­out risk.

One of the in­her­ent chal­lenges in these mar­kets is deal­ing with vo­latil­ity. Share prices, as well as cur­rency val­u­a­tions, can be sub­ject to more sud­den price move­ments, par­tic­u­larly when com­pared to de­vel­oped mar­kets.

Re­cent news­pa­per head­lines con­cern­ing the eco­nomic prob­lems in Ar­gentina and Turkey cer­tainly serve to high­light such short­term risks.

For in­vestors, the key is to fo­cus on the longer-term struc­tural story, typ­i­cally driven by the EM con­sumer. Vo­latil­ity may present short-term chal­lenges but it can also of­fer longer-term in­vest­ment op­por­tu­ni­ties and the abil­ity to buy into weak­ness.

This em­pha­sizes the im­por­tance

of work­ing with emerg­ing mar­ket spe­cial­ists, who have on-the­ground ex­pe­ri­ence and in-depth knowl­edge of these mar­kets, to en­able them to make longer-term ap­praisals and not be side tracked by short-term noise.

THE IM­POR­TANCE OF SPE­CIAL­IST KNOWL­EDGE

J.P. Mor­gan As­set Man­age­ment takes a very ac­tive ap­proach to emerg­ing mar­ket in­vest­ments. It takes what is known as a “bot­tomup” ap­proach: look­ing at the growth po­ten­tial of spe­cific com­pa­nies rather than sim­ply tak­ing a view on in­di­vid­ual coun­tries.

This, it be­lieves, is a sound way to de­liver value to in­vestors over the longer-term, by dif­fer­en­ti­at­ing win­ners from losers

In­vest­ment trusts are ide­ally suited to fa­cil­i­tate this longer term ap­proach. The fact that these are closed-end funds means that man­agers are not forced to sell stock in times of mar­ket tur­bu­lence to fund re­demp­tions.

Austin Forey, Fund Man­ager of the

JPMor­gan Emerg­ing Mar­kets In­vest­ment Trust

says this longterm strat­egy is re­flected in the com­pany’s stock choice. Its in­vest­ment phi­los­o­phy is to choose prof­itable com­pa­nies rather than suc­cess­ful coun­tries, in other words to fo­cus on mi­cro not macro.

He says: “We have a bias to­wards com­pa­nies with sus­tain­able com­pet­i­tive ad­van­tages, con­sis­tent cash­flow gen­er­a­tion and strong man­age­ment teams.”

“The port­fo­lio con­tin­ues to be po­si­tioned to ben­e­fit from the sec­u­lar growth in emerg­ing mar­ket con­sump­tion, in­clud­ing in­creas­ing pen­e­tra­tion of fi­nan­cial prod­ucts in un­der-banked mar­kets.”

This in­cludes long-term in­vest­ments in HDFC and In­dusInd, two pri­vate In­dian banks that con­tinue to cap­ture mar­ket share.

The Com­pany has re­cently added a hold­ing in Mer­car­doLi­bre, the largest e-com­merce com­pany in Latin Amer­ica . Given that UK con­sumers spend around 19pc of their in­come on­line but only 3pc in Brazil, Austin says such com­pa­nies of­fer huge po­ten­tial.2

He adds: “This ap­proach has worked well for the port­fo­lio over the long term and the team re­mains con­fi­dent that this is the right strat­egy to pur­sue in cur­rent mar­ket con­di­tions.”

For more in­for­ma­tion on the JPMor­gan Emerg­ing Mar­kets In­vest­ment Trust visit jpmor­gan.co.uk/jmg

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