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Sell-off through 2018 is starting to reverse as bargain opportunities emerge for this investment trust
Thursday 07 Mar 2019 Author: Steven Frazer

Emerging markets have swung back into favour with investors who spent most of 2018 pulling cash out of these higher risk regions.

Last year the MSCI EM Index fell 14.6% versus an 8.7% decline for the MSCI World Index, which includes major markets in Europe and the US.

Well-documented trade tensions between the US and China, a strong dollar (many emerging markets’ national debt is dollar denominated) and muted earnings made for a tough time last year.

‘It’s been disappointing,’ says Ayaz Ebrahim, one of the co-managers of JPMorgan Asian Investment Trust (JAI).

But January told a different story with the MSCI EM index having outperformed its global equivalent by 12.5%. Opportunity has come knocking.

‘China was very cheap compared to long-term averages,’ says Ebrahim who has been building positions in the country in recent months in spite of the nation already representing by far the trust’s biggest geographic allocation.

More than 36% of assets are in China. Add exposure to stocks in Hong Kong and Taiwan (heavily influenced by Chinese authorities) and you’ve got nearly 60% of the fund in one place.

About half of the trust’s top 10 holdings are China-based, including social media giant Tencent, its biggest single stake. The recent momentum has also seen the average 11% or so discount to net asset value narrow to around 7%, based on the current 354p share price. That’s not out of kilter with other Asia and emerging market funds.

The trust has also been investing in boots on the ground, its army of investment professionals across Asia now in excess of 100 people.


Ebrahim has been managing funds in Asia since the early 1990s and he believes that a lot has changed in China and elsewhere in Asia over the years. ‘Chinese companies are less state-owned while transparency and governance has got a lot better,’ he says.

For many investors, China has simply become too big to ignore. The World Bank believes that China leads the pack when it comes to economic growth. Even if growth is slowing, in the three years 2017 to 2019 the supra-national organisation expects it to account for 35.2% of global GDP growth.

The US (number two on the World Bank’s list) stands at 17.9% and the UK a piddling 1.6% by comparison.

China has long held a fascination for investors. The world’s most populous nation has multiple structural growth levers to pull; increasing life expectancy requiring better and more widespread health and financial services, access to improving education and communication, and many others.

This allows JPMorgan Asian to make decisions for the long-run and largely ignore the short-term volatility that comes with issues outside of its control, such as elections. Citizens are due to go to the ballot box in India and Indonesia (both April) and the Philippines in May, following those in Thailand last month.


Ebrahim bats off threats of political change, believing that reforms already in place are unlikely to be reversed even if, for example, Narendra Modi is ousted from office by Rahul Gandhi’s Indian National Congress, Modi’s chief rival in India.

The investment trust manager isn’t especially keen on India at present, citing such reasons as a banking sector still stinging from bad debt pressures, and company valuations that are ‘still a bit towards the higher end’.

Indonesia has been a more favourable hunting ground for JPMorgan Asian in recent times, reflected in its 2.9% stake in manufacturing conglomerate Astra International, one of the trust’s top 10 holdings.

But no decision is forever and following a strong end to 2018 for Indonesian markets, Ebrahim and his team have begun to reduce holdings this year.

Companies that might attract his attention in the future are likely to feature good corporate management teams, strong balance sheets and very good operational execution, dynamics that mean ‘these companies can continue to deliver’.

Before clocking up the air miles with company visits, prospective investments must first pass through JPMorgan’s proprietary Expected Returns Framework system.

The system crunches a deluge of operational, financial strength and valuation metrics modelled over a five year period, producing a single rating that can be used to compare businesses of different size, industry, location etc.

It looks at areas such as earnings growth, return on equity and price to book metrics, currency impacts, dividends, cash flows and changes in valuations.

JPMorgan Asian currently has about 55 holdings, according to Ebrahim, split between higher conviction larger stakes in bigger businesses sprinkled with higher risk but lower exposure to smaller enterprises.

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