JPMorgan Global Emerging Markets Income has published its results for the year ended 31st July 2022. The company beat its benchmar, with an NAV return of -4.7% against -8.7% for the MSCI Emerging Markets Index, but a widening discount left investors with a return of -9.4%. The dividend was upped from 5.1p to 5.2p and was well covered by earnings of 6.1p, helping to rebuild its revenue reserves.
The announcement reminds investors that the trust does not hedge currency moves. Weak sterling has been helpful over the year but this could reverse at some point.
The chairman notes that stock selection in China and Mexico was the most positive influence on relative performance. In addition, the manager’s decision to reduce the portfolio’s exposure to the geopolitical and macroeconomic risks associated with the Russian market from November 2021 onwards lessened the adverse impact of the Russian invasion and contributed to relative performance over the review period. Unfortunately, the trust’s Taiwanese exposure was a drag on both absolute and relative performance.
The manager highlights that the company’s outperformance was driven by both asset allocation and stock selection, however being geared into a falling market was unhelpful and that cost about 1.3% of returns.
As the manager highlights, China’s zero-COVID policy has had a big negative effect on its returns over the past year and this has dragged down returns on the emerging markets index as well as weighing on global growth.
From a country viewpoint, the company’s stock selection in China, underweights to some of the pure growth areas (for example, technology companies and ecommerce platforms such as Alibaba and Tencent) made a positive contribution to relative returns, as these sectors underperformed over the period, due to investors’ concerns about the implications of the Chinese government’s ‘common prosperity’ agenda. In addition, positions in financials and consumer stocks (for example China Construction Bank and Inner Mongolia Yili, a dairy company) performed relatively well during the year.
The manager goes on to say:
“Our exposure to Mexico was another positive contributor to relative performance, thanks in large part to our position in Walmart de Mexico (Walmex). This multi-format retailer is a good example of the kind of investment opportunity in which we are most interested. It is delivering a high return on equity and strong free cash flow generation and has a positive dividend policy. During the year, Walmex reported healthy earnings numbers and it appears to be coping with changes in the retail operating landscape. It is investing in technology and enabling its stores with omnichannel capability (such as ‘drive through pickup’ services or home delivery).
Indonesia was another market where we derived positive relative returns. Rakyat, a regional bank, announced its dividend for 2021, which showed a strong recovery after the challenges of 2020. Dividends per share rose 80.6%, implying a healthy yield. In addition, we welcome the company’s announcement of a buyback programme to reacquire shares totalling 0.4% of its market capitalisation, as we view share buybacks alongside regular dividend payouts as a healthy indicator of good corporate governance, as discussed in the ESG section below.
On the negative side, markets in both India and Saudi Arabia performed well, but our underweight positions relative to benchmark created a drag on relative performance. In the case of India, we find it difficult to find stocks offering an attractive yield, partly because India is more of a ‘growth’ market, and also, simply, because valuations are high, thanks to positive investor sentiment towards the country, which means the yields on offer are low.
Our exposure to Taiwan has been a source of positive performance for us for many years, but was a drag on returns in FY22. This was primarily due to our positioning in technology stocks, which suffered as interest rates rose and markets became more concerned about the possibility of a US recession which would dampen demand for tech products. This caused a derating of positions, including semiconductor manufacturers Novatek Microelectronics and Realtek Semiconductor.”
JEMI : Relatively good year for JPMorgan Global Emerging Markets Income