In the six months to the end of January emerging markets experienced a strong period, rising close to 12 per cent in sterling terms.
Two worries that had dominated the investment landscape receded, namely the eurozone debt crisis and the fear of a prolonged period of low growth for the Chinese economy.
Going into 2013, commodity prices rallied while the trade-weighted dollar declined, and investors continued to pour new money into emerging market equities. Since the middle of September, emerging market equity funds have experienced 20 consecutive weeks of inflows.
By country, Brazil continued to struggle, as concerns about government intervention in regulated sectors weigh on the market. Russia lagged in 2012 but has regained some lost ground in 2013, benefiting from higher oil prices and resilience in consumer spending.
Our Global Emerging Markets Income investment trust is intended to have low turnover, allowing it to benefit from the attractive compound growth in emerging markets and specifically the growth of dividends.
Consequently, sales of securities will be limited to situations where an investment appears to be overvalued, or the fundamentals of a company are not as originally anticipated, or when a significant corporate action occurs.
However, in recent months we sold CP Foods where a combination of corporate governance concerns and negative free cashflow did not seem to be compensated by valuation levels; and we reduced the trust’s holding in Bangkok Expressway.
These actions led to a reduction in the country weighting to Thailand. We also reduced our positions in Mexico, which now appears expensive.
Exposure to South Africa was increased significantly recently, through the purchase of Imperial and Sasol, and increased holdings in Brazil, a market which we consider to be undervalued. Our favoured countries remain Taiwan, Turkey and South Africa, rather than India and Korea where dividend yields are less attractive.
In terms of sector exposures, we have moved from an underweight to an overweight position in energy, while reducing the position in telecommunications. In addition, we have rotated slightly from investment in consumer staples into consumer discretionary stocks.
The improvement in sentiment around emerging markets continues to find support in economic data and in macro policy. Recent purchasing managers’ index data in China confirm that the rebound in activity remains on track.
India’s central bank demonstrated its commitment to a more pro-growth stance in January, cutting benchmark rates and raising expectations for additional cuts this year. The avoidance of the worst-case fiscal cliff and debt ceiling scenarios in the US has also helped sentiment, and this was a major contributor to the resumption of flows into developed and emerging market equities.
Valuations in emerging markets remain relatively attractive, and we are comfortable with a bullish medium-term view on these equities. However, considering the strength of the rebound in the past few months, we are sensitive to the potential for a market pause in coming weeks.
Richard Titherington is head of the emerging markets equity team at JPMorgan Asset Management
