JPMorgan Global Emerging Markets Income (JEMI) has released its annual financial results for the year ended 31st July 2024, during which it provided an NAV total return of +6.3%, closely aligning with its benchmark, the MSCI Emerging Markets Index, which returned 6.4%. JEMI provided a share price total return of +5.4%. Longer term, JEMI has outperformed its benchmark – during the last five years, the NAV total return +25.3%, significantly ahead of the benchmark’s total return of +12.7%. Share price return to shareholders, including dividends, was +15.5%.
Excitement about artificial intelligence (AI) was one of the main drivers of global equities, including Emerging Markets, over the past year, and JEMI’s chair, Elisabeth Scott, says that its returns were supported by the positive performance of a number of AI-related positions in South Korea and Taiwan. She adds that the ongoing weakness in the Chinese economy was another focus, and the decision not to own one of the largest Chinese internet retailers (Alibaba) also enhanced relative returns. The Indian market continued to strengthen, so JEMI’s underweight position in this market detracted from overall performance. This underweight is due in part to the fact that many Indian companies do not pay dividends and are therefore excluded from managers’ universe of stocks. In addition, the managers believe that valuations in the Indian market are high, so companies that do pay dividends are too expensive to meet their valuation criteria.
During the financial year, the company repurchased 6,799,472 shares into treasury, enhancing the NAV per share by approximately 1.1p or 0.8%.
Revenue and dividends
During the year, JEMI’s gross revenue for the year amounted to £21.2m (2023: £20.8m), with net revenue of £16.6m (2023: £16.9m). Net revenue return per ordinary share for the year, calculated on the average number of shares in issue, was 5.64p (2023: 5.70p).
JEMI’s total dividend for the financial year was 5.4p per share, representing a yield of 4% based on the share price as at 31 July 2024, and a modest increase from 5.3p in the previous year. The company has paid three interim dividends of 1.0p per share and a fourth interim dividend of 2.4p per share.
Loan facilities and gearing
JEMI’s board believes that gearing can be used to enhance long-term shareholder returns. At present, JEMI has a US$20m two-year revolving loan facility with Mizuho Bank Limited, which will be repaid in November 2024. The company also maintains a US dollar 20m revolving loan facility with ING Bank (‘ING’), which is repayable in October 2025, having been renewed during the reporting period at a competitive market rate plus Secured Overnight Financing Rate (SOFR).
In view of the pending maturity of the Mizuho facility, JEMI’s board says that it has been working closely with the manager to assess the trust’s borrowing options. As a result, a US$40m revolving credit facility has been negotiated, along with an additional US$20m accordion, provided by Industrial and Commercial Bank of China Limited (London) Plc (‘ICBC’) for two years, with two one year extension options. As part of this refinancing, the company intends to make an early repayment of the ING facility as well as repaying the Mizuho facility upon maturity in November 2024. As at 31st July 2024, portfolio gearing stood at 6.1% (31st July 2023: 5.7%).
Share repurchases and issuance
During the financial year ended 31st July 2024, the trust’s share price traded at an average discount to NAV of 11.8%.and JEMI bought back 6,799,472 shares into treasury for a total cost of £9,033,000 at an average discount of 11.7%. JEMI did not issue any shares. These purchases were value accretive for shareholders, increasing the NAV per share by approximately 1.1p.
Investment management fees
During the reporting period, the board agreed with the manager that the investment management fees should be tiered. With effect from 1st November 2023, the investment management fee has been charged on a tiered basis at an annual rate of 0.75% of the company’s net assets on the first £500mand at 0.65% of net assets above that amount. This compared with the previous arrangement under which the management fee was charged at an annual rate of 0.75% on net assets. The fee is calculated and paid monthly.
Continuation vote
At the forthcoming AGM an ordinary resolution will be put to shareholders that the company continue in existence as an investment trust for a further three-year period. JEMI’s board believes that the long-term outlook for global Emerging Markets is favourable, and that the investment manager has the resources and processes to deliver good results for shareholders. It therefore believes that continuation is in the best interests of all shareholders and strongly recommends that shareholders vote in favour of the resolution.
Investment manager’s comments on the investment environment
“Like their counterparts in developed markets, the attention of investors in Emerging Markets over the past year has been focused on Artificial Intelligence (‘AI’) and its potential to disrupt and reshape business practices in many sectors. Companies will need to increase capital expenditure to acquire and deploy new AI-driven technology and to stay competitive. Semiconductor manufacturers and related tech companies are already benefiting from strong demand, and their resultant share price gains have been a key driver for all markets. Within Emerging Markets, this influence has been most important in South Korea and Taiwan, which are home to many companies with exposure to the AI boom.
“The excitement about AI has spilled over into other sectors of the market such as energy and materials. AI-driven tools and their related storage and processing requirements are energy hungry, and electricity companies and energy infrastructure suppliers are perceived as major beneficiaries. So too are the producers of commodities such as copper, which is essential to the manufacture of semiconductors and energy transmission systems.
“Shareholder returns have been another key theme in both South Korea and China over the past year. In South Korea, the government launched a so-called ‘Value-Up’ initiative, which aims to encourage corporate managers to enhance shareholder value via increased dividend payments and share buybacks. The intention is to replicate the success of similar efforts by the Tokyo Stock Exchange, which have had a favourable impact on Japanese share prices.
“In China, we saw a brief rally going into 2024, inspired by short-term government stimulus and attractive valuations. However, structural issues remain, with ongoing weakness in the property sector continuing to weigh on consumer sentiment and hence on domestic demand, though the government has recently announced stimulus measures which could help improve this. As growth slows, investors’ attention has shifted to more yield focused names. Additionally, companies, especially China’s internet companies, are distributing more to shareholders, rather than reinvesting for growth. Geopolitical tensions between China and the US continue to simmer, creating a further potential drag on growth, especially via increased US sanctions and tariffs on Chinese electric vehicles and advanced tech products.
“The other predominant theme in Emerging Markets over the past year was the ongoing interest in India. The economy continues to grow at a fast pace, and optimism in India’s longer-term future is mounting amongst both domestic and international investors. This has resulted in further stock market gains.”
Investment manager’s comments on performance attribution
“The most significant positive contributor to performance at the stock level over the past year was our decision not to own Alibaba, a Chinese internet retailing behemoth. China’s property market slump and the more general economic slowdown have put pressure on consumers. This has adversely impacted internet retailers. To add to pressures on Alibaba, the company is also facing greater competition, as consumers are increasingly focused on value for money. Interestingly, as the market has become more pessimistic on the stock, we have in contrast become more interested, to the extent that we initiated a new position for the portfolio after the financial year end. It seems to us that the management team has recognised its growth issues and is acting in a more rational way to increase its ability to compete in this new environment (both in terms of more focus on the key e-commerce business and reducing emphasis on other non-core activities). In addition, the company has improved its cash shareholder returns, initiating its inaugural dividend last year and implementing share buybacks. This increased shareholder return, combined with a lower valuation than in previous years, made the stock look more attractive to us and prompted the new position.
“Vanguard International Semiconductor was a strong contributor to performance. This company operates semiconductor fabs, following the outsourcing foundry model where it manufactures chips for other companies who do not have a manufacturing capability. In the period, the company announced plans to expand capacity by building a new semiconductor plant, in a joint venture with NXP Semiconductor (a US semiconductor company). This was well received by markets as investors focused on the capacity increase in the long term which could drive earnings for the company. However, this also introduced potential downside risks to the nearer term earnings outlook given the large capex that would be required. Given this raised questions on the free cash flow profile of the company (and therefore dividend growth), we trimmed our holding.
“Within financials, two South Korean names, KB Financial and Shinhan Financial enhanced returns. This was largely driven by the favourable impact of the government’s ‘Value-Up’ program, discussed above, which has seen Korean banks announce measures to increase shareholder returns. Their stocks have re-rated accordingly.
“Infosys, an Indian IT services company, was another contributor to performance over the past 12 months. Fears that generative AI would be able to replicate the company’s IT outsourcing services weighed on the stock price during 2022. Infosys’s management sought to assuage these fears, claiming instead that AI will actually create more opportunities, as has been the case in the last few technological cycles. The stock has re-rated in recent months as investors’ AI-related concerns finally abated and the company’s earnings outlook improved.
“Brazilian stock exchange operator B3 SA Brasil was the largest detractor from returns due to weaker than expected trading volumes on the back of a challenging macro environment. The high interest rate environment and uncertainty about future interest rates particularly affected the cash equities business. However, valuations are now at an attractive level, and it is well positioned for when the macroeconomic environment improves. We also like this quality business as it generates strong free cash flow, has few competitors, and is making successful efforts to diversify its revenue streams. Additionally, it boasts an attractive dividend policy.
“Within our holdings in consumer staples, an overweight in Wuliangye, a baijiu (Chinese liquor) producer, detracted from returns. The company’s share price declined due to concerns that the domestic economic slowdown would damage future sales. With its strong brand and market position we continue to see this company as a long term winner in the sector and retain a position; for the overall portfolio we are continuing to evaluate how best to position within the China consumer space, considering the economic headwinds which exist.
“Another detractor from performance at the stock level over the review period was Indonesia’s Bank Rakyat, which suffered a deterioration in asset quality in its key microfinance division, with small borrowers incrementally less able to repay loans on time. We believe this deterioration is cyclical, but market focus on these near-term headwinds led to weakness in the share price. In our view the investment thesis remains intact, and we continue to hold the stock.
“Another stock which detracted was Kimberly Clark Mexico, a Mexican consumer goods company. As discussed below, the political situation in Mexico caused weakness for the entire market which was unhelpful. In addition, the Mexican peso also weakened – this was incrementally negative for the company’s cost profile as many of its raw materials are priced in US dollars, while it prices its products in pesos. In a short term time-frame, it is difficult for the company to reprice its products quickly with negative consequences for the operating margin. In the long term we are still confident on the pricing power and cost efficiency gains the company can generate, and continue to hold our position.
“Our decision not to own Hon Hai was relatively negative for our performance, as the stock outperformed in the period. This Taiwanese downstream technology manufacturer performed strongly as investors became more excited about its prospects for earnings growth as AI demand increases. We prefer to gain exposure to this area via other stocks such as Quanta which we see as better positioned in terms of product exposure and where valuations (including yield) look attractive.
“Our country allocations had a negative impact on relative performance over the year. Our overweight exposure to South Korea was the most important positive contributor. This was entirely the result of successful stock selection. The government’s ‘Value-Up’ program has seen many companies announce plans to distribute more cash to shareholders. Our holdings in financials have done particularly well as a result, as mentioned above, and so too have our positions in several auto manufacturers, SK Telecom and Samsung Electronics.
“The excitement surrounding AI ensured that our overweight to Taiwan was another notable contributor to performance. TSMC and other Taiwanese tech companies are at the forefront of the AI revolution and our investments in companies such as Wiwynn, a supplier of computer hardware and Quanta Computer, a leader in hyper-scale servers, as well as in TSMC, did well over the past year.
“Despite the Chinese economic slowdown, our modest overweight to China had a favourable impact on returns, thanks to our stock selection decisions. As growth slows, investors typically value companies which offer income. This aligns with our investment strategy and some of our holdings have benefited as a result. Tencent, an internet company whose offerings include social networking, e-commerce, mobile gaming and financial payments is one example. This stock has only recently entered our investment universe, as it has increased its shareholder returns. At the same time, the stock has become more attractively priced, and our decision to open a position subsequently enhanced returns.
“Additionally, high yielding names such as Yangtze Power, China Construction Bank, and Sinopec, an oil and gas producer, performed well. Lastly, with the domestic economy slowing, we are increasingly interested in large exporters, given their limited exposure to the domestic economy. Our holdings in Fuyao Glass, an auto parts producer, Midea and Haier, both home appliance makers, have all performed well thanks to export demand.
“However, the favourable impact of these positions was not sufficient to fully offset the adverse effect of our positioning in other markets. The Indian market performed well, and our underweight relative to the Benchmark created a drag on relative returns. It is difficult to find Indian stocks offering an attractive yield, partly because India is more of a ‘growth’ market, and because valuations are high, which means the yields on offer are correspondingly low. As the valuations of Indian stocks are amongst the highest across Emerging Markets, we typically find better value opportunities elsewhere, notably in Taiwan, which offers high growth opportunities at a more reasonable price.
“Our overweight in Indonesia also detracted from returns due to political concerns, as well as some short-term, stock specific issues with holdings including Bank Rakyat, mentioned above. However, our conviction in the long-term investment thesis for this and other names remains intact. Lastly, our overweight in Mexico also detracted, due to political developments. The new president’s decision to push through judicial reform raised question marks over the effectiveness of governance checks and balances in Mexico. Although this spooked markets, her success does not fundamentally change our view on the growth opportunities of the Mexican companies we own. In addition, the Mexican economy is a major beneficiary of the trend towards nearshoring, as global manufacturers shorten the supply chains for goods destined for the US market.”
Investment manager’s comments on portfolio positioning and changes
“We build our portfolio from the bottom up, selecting stocks based on their sound fundamental qualities, strong balance sheets and capacity to pay dividends over the long term. Naturally, some areas within Emerging Markets offer more investment opportunities than others, and this results in portfolio tilts towards some sectors and countries and a very active portfolio. From a sectoral viewpoint, we tend to find the most attractive income opportunities within Information Technology, Consumer Staples and Financials, so these are the portfolio’s three key sector overweights, while the portfolio is usually underweight in Materials, Industrials, and Healthcare. Overall, the portfolio has a high active share versus the Benchmark (74.8% at end of July 2024), demonstrating that we have a differentiated approach compared to the broader market.
“At the country level, significant portfolio overweights include South Korea, Indonesia and Mexico – as with our sector allocations, these country weightings are driven by the many individual stock opportunities which we view as attractive from an income investor’s perspective. In contrast, our largest country underweight is India. India’s long-term growth prospects are very good and investor interest in this market is high. However, as mentioned above, this is reflected in valuations, which makes it difficult for us to find attractive, income-paying stocks. The portfolio has a slightly overweight position in China and Hong Kong combined. China faces some challenges, including weak consumer demand, a stricken property market and a fractious relationship with the US, as discussed above, but we think overall valuations are more attractive after recent market weakness. The Chinese market’s dividend outlook is also becoming more positive.
“The portfolio changes we have implemented over the past year have mainly been motivated by individual stock considerations. Declines in valuations provided opportunities for us to open new positions in a number of companies including Tencent, as mentioned above. We expect this company to remain resilient due to its leading position within its sector, and the prospect of higher cash distributions to shareholders creates an attractive investment case. With valuations in the company much lower after a significant and protracted sell-off from their peak in early 2021, we took the opportunity to initiate a position in this high-quality company at an attractive price. We also purchased Quanta Computer, as demand for their hyper-scale servers is likely to grow for many years, as the AI revolution broadens and deepens, and we expect profitability to improve accordingly.
“We took advantage of more attractive valuations and improved fundamentals to add to several existing positions across markets and sectors. Examples include Realtek Semiconductor, a Taiwanese semiconductor design company involved in Wi-Fi and audio products, and Walmart de Mexico, a food, clothing, and general merchandise retailer. Conversely, we trimmed positions where we thought valuations were beginning to look stretched after relatively strong performance. One such case was Southern Copper, a mining company with operations in Peru and Mexico. This remains an interesting investment given that long-term demand for copper is likely to be strong, as discussed above. However, the stock’s performance has reduced its yield and inflated its valuation, so we reduced our position size.
“One notable disposal over the past year was the closure of our position in Bid Corp, a South African food distributor. This company has performed well over the years, in line with our expectations, and with its valuation looking toppy, we decided to take profits and rotate into other, more attractive names, with greater potential upside. However, this is a good example of a successful investment in a high-quality company, and we would consider re-opening a position in Bid Corp if valuations look more attractive or if the company shows potential for further growth.”