JPMorgan Asset Management’s Ayaz Ebrahim and Richard Titherington have backed one of the world’s best-performing equity markets to continue to soar this year, suggesting recent earnings growth more than justifies a 25 per cent year-to-date rally.
Mr Ebrahim, who manages the £322m JPMorgan Asian Investment Trust alongside Mr Titherington, has been selling Indian and Chinese stocks and buying South Korean equities in the belief they are still undervalued.
“Korea has always been cheap and everybody knows that, but even compared with itself over the long term, it is cheap,” he said.
“[The country] is the best-performing market in the Asian region, but the price-to-earnings ratio is still just below 10 times forward.”
The MSCI Korea index has risen 26 per cent in sterling terms this year, and is up 22 per cent on a local currency basis.
“Earnings growth is showing through strongly. A lot of that return is driven by earnings growth and not a revaluation by the market,” Mr Ebrahim said.
As a result, the trust’s managers have been upping exposure to the country.
Mr Ebrahim declined to discuss which individual holdings had benefited from this, but Samsung was the trust’s largest position at the end of June, representing a 7.6 per cent weighting.
JPMAM also declined to comment on the August 25 news that Samsung’s vice-chairman had been sentenced to five years in jail for bribery and embezzlement.
“The new administration [in Korea] has been vocal about improving shareholder returns and corporate governance issues. This is a multi-year story,” Mr Ebrahim said.
He added: “The next important step will be some time in September on share buybacks from Samsung. That tends to be the poster child for Korean corporations.
“Also, domestic pension funds will put pressure on other companies to essentially start and accelerate what they are doing in this area.”
To fund an increased weighting to Korea, Mr Ebrahim has taken profits made in two popular emerging market regions: India and China.
“We have been reducing India over the past six months,” he explained. “We are still fundamentally very positive but it’s a question of valuations. We have been top-slicing.”
The managers have been cutting exposure to the country’s privately owned banks.
Meanwhile, a withdrawal of fiscal stimulus has left them anticipating an economic slowdown in China, though the team still favours sectors such as e-commerce.
The MSCI China index has gained 40 per cent this year in local currency terms.
“We felt we had better opportunities in Korea than China,” said Mr Ebrahim.
“With China we have had the withdrawal of fiscal stimulus. We expect the economy now to tail off.”
The team’s decision to take gains from some high-profile emerging market countries comes during a period when the asset class is enjoying a return to popularity.
Mr Ebrahim suggested this was partly behind elevated valuations in certain regions.
“Increasing emerging market flows may mean some stocks have stronger momentum because money is chasing certain things in the marketplace,” he said.
“The important thing is to keep discipline. If prices go up to an extent where we think short and medium-term returns may be impacted, we have to be disciplined.”
The trust has performed well over three years, returning 70.1 per cent versus the 48 per cent average from its AIC Asia Pacific ex Japan peer group, data from FE Analytics shows.
