Currency woes have forced JPMorgan Asset Management’s Omar Negyal to reverse his bullish stance on South Africa.
In 2013, Mr Negyal - manager of the £274.8m JPMorgan Global Emerging Markets Income trust - praised South Africa for its strong dividend-paying culture, but he has been reducing his exposure recently.
The manager said that while South Africa was still a “very interesting area for dividend stocks for us”, there were huge risks due to the growing weakness of its currency, the rand.
In an effort to halt the rand’s depreciation, South Africa rose its main interest rate from 5 per cent to 5.5 per cent last week. However, this did not prevent the rand hitting a five-year low against the dollar.
Mr Negyal said the investment trust still had an overweight position towards South Africa but he had reduced the exposure recently.
Having been the largest country weighting in the investment trust halfway through 2013, the South Africa position was reduced from 15.3 per cent at the beginning of September to 12.1 per cent at the end of December.
South Africa is one of the ‘fragile five’ emerging market countries, which are so-called because they have large current account deficits, which means they rely heavily on external financing.
These countries – India, Indonesia, Turkey, Brazil alongside South Africa – are therefore set to be hit hardest by the withdrawal of the easy money provided by the bond-purchasing programme, known as quantitative easing, in the US.
Experts expect the reduction in bond buying by the US will cause the fragile five’s currencies to weaken, which will hurt overall stockmarket returns in sterling terms.
Mr Negyal said that although his investment process is driven by stock selection, he does not want the trust’s performance “to be driven by a short-term currency view”, which is why he has reduced his position in South Africa.
He explained that currency issues are the “biggest risks for emerging markets in the short term”.
Mr Negyal said many emerging markets had seen their currencies appreciate during the commodities boom, as a large number of them were commodity producers, but the recent weakness had wiped out much of the gains.
He warned that while the currencies may now be fair value compared to developed currencies, they may not stop depreciating and “that is the main risk in 2014”.
He has used the money raised from selling positions in South Africa to add to “areas where there is not that level of [currency] risk”, such as Taiwan and the Middle East.
Taiwan is now the biggest weighting in the fund, at 15.8 per cent, and Mr Negyal said he was finding good dividend-paying companies in sectors such as telecoms, retail and even technology.
He said there was a growing dividend-paying culture in Taiwan, while in the Middle East countries such as Qatar, UAE and Saudi Arabia, there was a stronger dividend culture than in most other emerging markets.