‘Alibaba’s down 45pc, but I still back Chinese stocks’

Investors shouldn’t be afraid of feeling ‘dumb’ for not owning commodities, Austin Forey of JPMorgan Emerging Markets tells Danielle Levy

Investors in emerging markets have every right to feel disappointed. These markets have experienced heightened volatility with investors growing nervous about rising interest rates. Making matters worse, China – the regional superpower – has experienced a raft of problems: from recent lockdowns which sparked factory closures, tightened regulations across the technology and gaming sectors, through to a crisis at property developer Evergrande.

Despite these challenges, Austin Forey, co-manager of the JPMorgan Emerging Markets Investment Trust, believes there are opportunities to be found in China, particularly in consumer and services businesses.

It has been a tough year for his £1.2bn trust. The share price is down 22pc versus a 20pc fall by rivals. While he acknowledges it may feel “dumb” not to hold many “value” style stocks right now, he remains confident in the high-growth companies in his portfolio, even if they are out of favour.

HOW DO YOU PICK STOCKS? We tend to hold stocks for a very long time and look for really good businesses that are able to grow over many years. Before we invest, we ask two questions: is this an attractive business which is going to create value for shareholders – and do we understand what is going to drive this? The second question concerns whether we want to own it at today’s share price.

ARE YOU AVOIDING ANY PARTS OF THE MARKET?

We look for well-governed businesses with strong economics and competitive positioning. You tend to find these characteristics frequently in some industries, but they are harder to find in others, so we have some long-term biases in the trust.

One area we don’t tend to have exposure to is commodities. Obviously, that feels pretty dumb at the moment, but our reasons are the same as they were before: we understand that commodities come and go, and there are cycles.

DOES THE FUND HAVE EXPOSURE TO RUSSIA?

I would love to say we don’t have any exposure, but we did have one stock and that has cost us money. We have one residual investment in Sberbank, which has a very low value.

WHERE ARE YOU SEEING OPPORTUNITIES?

If you look at a big, liquid, deep market that has come down a long way and has lagged other emerging markets it is China. The reasons for that are pretty well-known and obvious. That seems to us to be a logical first place to look.

WHY HAS THE TRUST’S PERFORMANCE DISAPPOINTED OVER THE PAST YEAR?

There are a lot more concerns about interest rates in comparison to six months ago. This has caused investors to adjust their “discount rates”, which determine the present value of a company’s future cash flows. As higher interest rates diminish these, valuations have come down. Also, inflation is a direct challenge to corporate profitability in every sector around the world, albeit to different extents. These are two big negative drivers of stock market returns.

Of the two, the change in the interest rate outlook has had the biggest effect. “Value” stocks have obviously done better than long-term “growth” stocks – and we tend to hold a lot of the latter and not many of the former. Nevertheless, we have been through difficult periods before, and we are not expecting to change our approach radically because of a six-month performance period.

IS INFLATION HAVING AN EFFECT? This is when you find out who has “pricing power” and who doesn’t. The trust has a big exposure to consumer-facing businesses, which we hope and expect to have a degree of pricing power because they are selling low ticket items with a well-known brand, where the consumer is not that sensitive to a 5pc rise in the price. If you are selling something significantly more expensive, it is more of a problem if you try to put the price up by 5pc.

WHAT HAVE BEEN YOUR BEST AND WORST INVESTMENTS? Kweichow Moutai is a spirits business in China with one of the most famous brands in the country. It is demonstrating pricing power and volume growth in spite of the wider economic slowdown in China. Its share price is up 100pc over the past three years.

On the flip side, Alibaba’s share price is down 45pc since this time in 2019. A combination of intensifying competition, tighter regulation and recent Covid-driven lockdowns have all contributed to a poor outcome for the Chinese e- commerce giant.