According to the experts it’s not too late to invest in the emerging markets rally despite a buoyant 2017.

One of their number is Carlos Hardenberg, manager of Templeton Emerging Markets Investment Trust (TEM), who believes the emerging markets recovery underway since 2016 shows little sign of abating and that there’s more room for corporate earnings to recover.

ROOM TO REBOUND?

As Hardenberg commented in a recent 2018 outlook for the asset class, earnings are improving after being under pressure, visibility is better and there is still scope for further recovery which means valuations are still ‘very attractive’.

He also notes that there is likely to be volatility but institutional investors are still underweight emerging markets based on their contribution to global GDP.

Investors can access this compelling emerging markets story through a variety of professionally-managed funds. Among open-ended funds, they include strong five-year performers such as Hermes Global Emerging Markets (IE00B3DJ5K90), guided by Gary Greenberg and with money to work in Samsung and Sberbank, and the Nick Price-managed Fidelity Emerging Markets (GB00B9SMK778), whose positions include Taiwan Semiconductor and AIA Group.

Other options include UBS Global Emerging Markets Equity (GB00B7L34154) and Neptune Emerging Markets (GB00B8J6SV12), both portfolios invested in Tencent, Alibaba and Naspers.

WHY JEMI’S A GEM

As at 12 Jan ‘18, and despite the emerging markets rebound, the average discount in the Association of Investment Companies’ (AIC) Global Emerging Markets sector is 8.9%, with only four of the sector’s eleven companies trading at a premium. They include the Jupiter Emerging & Frontier Income Trust (JEFI), BlackRock Frontiers (BRFI) and also Terry Smith’s Fundsmith Emerging Equities Trust (FEET). The latter is geared into the rise of the consumer classes in developing economies and has seen its shares appreciate strongly since the back-end of last year.

The other is JP Morgan Global Emerging Markets Income Trust (JEMI), trading at 0.8% premium in part explained by its focus on quality businesses that generate cash and pay sustainable dividends. Speaking to Shares recently, co-manager Omar Negyal said he is ‘quite comfortable with emerging markets valuations’.

Negyal continues: ‘Valuations are not quite as cheap as they were a year ago, but these were off extremely depressed levels so we’ve rallied off the bottom. We have mid-cycle valuations now. There is still further to go in terms of re-ratings. Income stocks are still cheaper relative to the asset class as they tend to be a value play.’

‘I only invest in dividend paying stocks,’ he adds.

JP Morgan Global Emerging Markets
Income Trust

• Ticker: JEMI

• Latest share price: 141p (AIC)

• NAV: 139.84p (AIC)

• Premium: 0.8% (AIC)

• Dividend yield: 3.5% (AIC)

• Co-managers: Omar Negyal, Jeffrey Roskell, Amit Mehta

A-SHARES EXCITE

One area Negyal has been harvesting dividends from is the newly available domestic China A-Shares universe, ‘a really exciting opportunity for income investors in emerging markets’ where he has been building up JEMI’s exposure.

He credits the increased availability of China A-Shares through the Shanghai-Hong Kong and Shenzhen-Hong Kong Stock Connect programmes as a factor in his decision making. Compared to H-Shares, which tend to be dominated by state owned industrial enterprises, Negyal says A-shares offer a much broader investable universe of private companies with attractive dividend payouts and strong free cash flow.

‘We began participating in 2015,’ says Negyal, who says the A-Shares market ‘widens the number of income opportunities in China and means we can find companies that are a little bit different from the ones that have been listed in Hong Kong.’ He also explains this has been an area where it has been more possible to find quality names in China which provides more reassurance in terms of overall dividend sustainability.

Portfolio positions include home appliances-to-commercial air conditioners producer Midea, whose wares are sold into the domestic and export markets. ‘This is an industry where there are only a few dominant players and Chinese buyers buy local brands,’ says Negyal, explaining Midea generates high levels of profits and cash and pays high levels of dividends to shareholders.

Another preferred pick is Fuyao Glass, an auto glass manufacturer and a ‘private company with a strong foothold in its own particular sub-sector. It makes window screens for cars in China and for international car manufacturers,’ says Negyal, also highlighting Fuyao’s ‘very, very healthy profit structure and an ROE (return on equity) of 25%.’

Prospective investors are also buying an exposure to Henan Shuanghui, the largest Chinese pork producer which is strongly cash generative and offers a 5% dividend yield. Henan is ‘very dominant in terms of its own business,’ according to Negyal, who says ‘the outlook for growth is positive thanks to the upgrade potential of Chinese consumers’, i.e. the middle classes trading up to more expensive food products.

In the beverages space, another A-share holding is Jiangsu Yanghe Brewery, which is ‘very, very domestically orientated, but it is taking its brands and expanding into other provinces in China. What has impressed me is the level of detail and rigour with which they are implementing their strategy. Impressive management is another feature of why some of these A-shares are attractive to me.’

‘From a value opportunity perspective, the Russian market looks very interesting today,’ says Negyal. ‘We’ve been adding to Sberbank, the dominant banking franchise in that market, where we’ve seen an increase in dividend payouts.’

‘South Africa has amongst the highest quality management teams in the asset class. They’ve been reinvesting profits for growth and paying dividends to their shareholders,’ says Negyal, bullish about the high quality management team at leading South African bank FirstRand.

One significant headwind for the trust over time has been its lack of ownership of high-flying internet-related stocks such as Alibaba, Tencent, Naspers and NetEase. These don’t fit with the trust’s strategy ‘to find good quality income producing stocks which have the capability to grow over the medium term.’ (JC)

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