Download Emerging Markets – Income Opportunities

Emerging Markets – Income Opportunities
Luke Richdale, Client Portfolio Manager, Emerging Market Equities
September 2013
Source: Investors Chronicle as at 6 September 2013,
Recent coverage of Emerging Markets…
Source: Financial Times, Shutterstock. Images for illustrative purposes only.
1
What has been happening?
1.
sluggish growth in major market economies including China
2.
currency weakness in countries that need external financing
... unless you believe there is an impending crisis, we believe Emerging Markets look like good
value
Source: Financial Times, KBK Infographics. Images for illustrative purposes only.
2
Back to the future ...Is this 1997 again?
1990s
Today

Pegged currencies

Floating currencies

Misallocation of capital

Profitable businesses

Weak balance sheets with currency
mismatches

Limited cases of excess leverage
and currency mismatches
... Emerging markets have matured, currencies can now adjust
Images for illustrative purposes only.
3
Valuations now look unambiguously attractive
Price-to-book has now edged into the range from which returns have almost invariably been positive
GEM Index and Price-to-Book: 1993 – September 2013
Euphoric
Optimistic
Neutral
Pessimistic
Panic
Source: Bloomberg, Factset, UBS, Data as at 2 September 2013
4
The case for income in emerging markets

Increasingly sustainable source of income based on improvements in capital discipline

Combination of income and growth are a powerful source of total returns

Dividends are the most stable component of total returns allowing investors to take a medium term view

Expansion of investment universe makes a diversified income
strategy possible today
5
Robust profitability continues to drive profits … and dividends
MSCI Emerging Markets Index: long term growth in dividends and earnings
Index, 100 = Jan 1990
EM
DM
10 years Compound Annual Growth Rates
EPS
DPS
Emerging Markets
11.0%
15.4%
Developed Markets
8.2%
7.5%
Source: MSCI, IBES, FactSet, J.P. Morgan Asset Management. Regular dividends only in local currency. As at end June 2013. Past performance is not an indication of future performance
EPS – Earnings per share. DPS – Dividends per share
6
EM companies provide a sustainable source of income
Emerging Markets payout ratios stable as borrowing falls (%)
Dividend Payout Ratio
Net Debt/ Equity
Source: MSCI, IBES, Morgan Stanley as at June 2013, GEM universe. E = MS estimate. Past performance is not an indication of future performance. For illustrative purposes only
7
… even as they continue to grow
Long term dividend growth tested by crisis (% p.a.)


Emerging Markets has offered a combination of
–
Attractive growth and dividends
–
Maturing growth with rising dividends
Four key sectors
–
Consumer (Discretionary and Staples)
–
Financials
–
Information Technology
–
Telecommunication Services
Dividend growth of key sectors (% p.a.)
Source: MSCI, IBES, Morgan Stanley as at end June 2013, GEM universe. * = MS estimate
Cons Disc
Cons Staples
Financials
Info Tech
Telecoms
Dec-07
-1.3%
16.3%
23.4%
37.8%
21.2%
Dec-08
-20.1%
-7.9%
-2.3%
3.2%
13.0%
Dec-09
-0.6%
19.6%
-23.3%
-33.3%
18.0%
Dec-10
35.1%
22.4%
41.9%
48.6%
0.8%
Dec-11
5.9%
3.1%
12.1%
3.4%
1.8%
Dec-12
14.2%
8.4%
4.7%
-10.9%
5.9%
Dec-13E*
15.0%
21.4%
11.7%
6.7%
1.1%
Source: Morgan Stanley as at end June 2013
Past performance is not an indication of future performance. For illustrative purposes only
8
The combination of income and growth has been powerful
Emerging Markets have strongly outperformed UK
…. and higher yielding EM stocks have beaten the EM index
Index, 100 = 28th February 2001
Index, 100 = 28th February 2001
Source: Factset as at 30th June 2013
Source: Bloomberg, FTSE, MSCI , UBS, rebased to GBP, as at end June 2013. Annualised returns
Top third of yielding stocks in MSCI EM Index, region neutral.

EM higher dividend yield
16.4% p.a.

MSCI EM Index
10.8% p.a.

FTSE 100 Index
4.1% p.a.

Higher yielding EM stocks have outperformed the
wider asset class consistently over the last 15
years
High yield as provided by UBS. There can be no guarantee that the targeted yield will be achieved and therefore such
forecasts are not a reliable indicator of future performance
Calculated as top third yielding stocks in MSCI EM Index.For illustrative purposes only
9
Dividend yield combined with dividend growth in up/down markets
Combining high dividend yield with high dividend growth performs well in both rising and falling markets
Annualised
Median 1-Month
Return
Source: BofA Merrill Lynch GEM Quantitative Strategy ,MSCI, IBES, Worldscope. As at December 2012
10
A broad investment universe
Greater style and geographic diversification possible and desirable
Number of companies that meet selected Average Daily Volume hurdles
418
Source: JP Morgan Asset Management, Bloomberg, data as at 16th July 2013. Companies with minimum market cap USD 1 billion, average daily traded value USD 1 million, and yield > 4%. 412 in
EM. The use of the above company logos is in no way an endorsement for JPMAM investment management services.
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Income in Emerging Markets is more than just Asia
By region
%
Source: MSCI, Factset and CIRA (Citi Investment Research and Analysis) . As of end June 2013. CEEMA - Central & Eastern Europe, Middle East & Africa.
Past performance is not an indication of future performance
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JPM Global Emerging Markets Income Trust plc

Name:
JPM Global Emerging Markets Income Trust plc

Index:
MSCI Emerging Markets Net Index (Total Return) GBP

Manager:
Richard Titherington (lead), Omar Negyal

Process:
Fundamental, bottom-up, value bias

Target yield:**
4% per annum

Current underlying yield:*
5.3%

Holdings:
50 – 80

Turnover:
Below 50% per annum

Inception:
July 2010
•Estimated
underlying portfolio yield as at 31st July 2013 (gross)
** Target yield (net)
This slide references certain internal targets and guidelines relating to the Fund. There is no assurance that the targets will be achieved or guidelines met
They may also be subject to change at the discretion of the Investment Manager.
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Emerging Markets Equity Team Structure
Investment Professionals:
Average years with firm:
Average years industry experience:
Client Team
Thomas
Leventhorpe
(6,29)
Luke
Richdale
(20,20)
Noriko
Kuroki
(10,17)
Curtis
Butler
(1,20)
Claire
Peck
(10,10)
Eric
Bian
(6,6)
Timothy
Morris
(9,9)
Emily
Whiting
(8,8)
Robert
LeDoux
(8,8)
Rebecca
Platts
(6,6)
Chief Investment Officer
Richard Titherington
(27,29)
Trade
Implementation
Steve
Avenell
(16,16)
Global and Regional Portfolio Managers
Rob
Maher
(1,1)
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13
Austin
Forey
(25,25)
Amit
Mehta
(2,12)
George
Iwanicki
(21,25)
Luis
Carrillo
(15,21)
Sebastian
Luparia
(17,20)
Oleg
Biryulyov
(19,19)
Leon
Eidelman
(11,11)
Omar
Negyal
(1,14)
Anuj
Arora
(7,10)
Sophie
Bosch de Hood
(14,14)
Jorge
Oliveira
(7,21)
Sonal
Tanna
(14,14)
Mary
Harvey
(7,8)
Amy
Thavornsuk
(2,6)
Priyesh
Mistry
(6,7)
Carmen
Pedraza
(7,7)
Sector Analysts
Financials
Li
Tan
(2,2)
Chris
Birney
(4,13)
Elizabeth
Pang
(8,8)
Mark
Ferguson*
(14,14)
Consumer
Lauren
Carter
(6.6)
Natural Resources
Odette
Wang
(7,7)
Aline
Gaspar
(8,8)
Adam
Spagnoletti
(2,7)
Simon
Rogers
(4,21)
Gokhan
Ates
(2,7)
Catherine
Moong
(8,13)
Yatian (Atena)
Liu
(<1,<1)
Andrew
Tan
(6,19)
Nika
Lysogorskaya
(3,7)
Industrials
Sandro
Apostolico
(17,17)
John
Citron
(4,4)
Felipe
Teixeira
(3,7)
Cheng-Joo
Cheng
(8,20)
Product Analysts
Global -Diversified
Joyce
Weng
(3,5)
Kate
Murphy
(6,6)
EMEA
Global – Small Cap
Lina
Nassar
(2,2)
Xiaoyu
Liu
(6,6)
Pandora
Omaset
(13,17)
Vitaly
Kazakov
(10,11)
Habib
Saikaly
(2,7)
* Head of Research
(Years with firm, Years total experience) As of September 2013. There can be no assurance that the professionals currently employed by J.P. Morgan Asset Management
will continue to be employed by J.P. Morgan Asset Management or that the past performance or success of any such professional serves as an indicator of such
professional's future performance or success.
14
Paul
Chan
(14,20)
How do we value the business
Five year expected return
Earnings growth
Earned by
the company
Dividends
Change in Valuation
Delivered by
the market
Currency
=
Expected
Return
15
Powerful combination of Income & Growth
TARGET
20% of portfolio
TARGET
60% of portfolio
TARGET
20% of portfolio
Low dividend yield
Target dividend yield
High Dividend Yield
( <3% )
( 4-6% )
( >6% )
Source: J.P. Morgan Asset Management. For illustrative purposes only.
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JPM Global Emerging Markets Income Trust plc
… long term, income + growth, 4% net yield p.a.
The companies/securities above are shown for illustrative purposes only. Their inclusion should not be interpreted as a recommendation to buy or sell. J.P. Morgan Asset Management may or
may not position on behalf of its clients in any or all of the aforementioned securities. Yield is target per annum. The companies/securities above are shown for illustrative purposes only. Their
inclusion should not be interpreted as a recommendation to buy or sell. J.P. Morgan Asset Management may or may not positions on behalf of its clients in any or all of the aforementioned
securities.
17
JPM Global Emerging Markets Income Trust plc - Portfolio breakdown
Regional breakdown
Country breakdown
Sector breakdown
Source: J.P. Morgan 31st August 2013. The strategy is an actively managed portfolio; holdings, sector weights, allocations and leverage, as applicable are subject to change at the discretion of the
Investment Manager without notice. Exposure may not add up 100% due to gearing.
... Mid cap exposure to Emerging Markets
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JPM Global Emerging Markets Income Trust plc - Performance
Annualised performance to 31st July 2013 (%)
Fund Size: GBP 283 Million
Excess returns (%)
+0.8
+5.0
+9.3
+12.4
Source: J.P. Morgan Asset Management, Net of Fees, NAV to NAV gross income reinvested, GBP. Inception date 28 July 2010.
Excess return is calculated geometrically. Past performance is not an indication of future performance.
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+8.9
+9.1
Biography
Richard Titherington
Richard Titherington is the Chief Investment Officer and Head of the Emerging Markets Equity Team. An employee since 1986, Richard
transferred to the Pacific Regional Group in 1994. He was appointed as a managing director in April 2001 and appointed head of the global
emerging markets business in December 2001. Prior to 1994 Richard was a US and international pension fund manager, working in the UK until
he transferred to Hong Kong in 1992. Before joining the firm, Richard spent two years as an analyst with UKPI in London. Richard obtained an
M.A. in politics, philosophy and economics from Oxford University.
Omar Negyal
Omar Negyal is a Portfolio Manager on the Emerging Markets Equity Team. Omar joined in October 2012. He has 14 years’ experience in
Emerging Markets, with previous analyst and portfolio manager roles at HSBC Global Asset Management, Lansdowne Partners and F&C Asset
Management. Omar has an MA, MEng in Chemical Engineering from the University of Cambridge and is a CFA Charterholder.
.
There can be no assurance that the professionals currently employed by J.P. Morgan Asset Management will continue to be employed by J.P. Morgan Asset Management or that the past
performance or success of any such professional serves as an indicator of such professional's future performance or success.
Investment ideas
Prospective yield:



2.3%
Taiwan, Consumer Staples
Operator of 7/11 Taiwan, the largest
CVS chain with a dominant share,
generating strong cash flows.
Robust growth from Starbucks (Taiwan,
Shanghai), President Pharm, and 7/11
Philippines.
Tupras Turkiye Petrol Rafinerileri
Banco do Brasil
President Chain Store
Prospective yield:



7.8%
Brazil, Financials
The largest Brazilian bank with the
biggest retail branch network in
Brazil, offering diversified financial
service activities
High single digit growth projected
Prospective yield:



Turkey, Industrials
The only domestic oil refiner in Turkey,
benefitting from a highly favourable
industry structure resulting in high
profitability.
High single digit growth projected
Source: Bloomberg. Company accounts. August 2013
The companies/securities above are shown for illustrative purposes only. Their inclusion should not be interpreted as a recommendation to buy or sell. J.P. Morgan Asset
Management may or may not positions on behalf of its clients in any or all of the aforementioned securities.
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9.2%
JPMorgan Global Emerging Markets Income Trust plc:
Risk profile

Risk Profile
–
–
–
Investments in emerging markets may involve a higher element of risk due to political and economic instability and
underdeveloped markets and systems
Exchange rate changes may cause the sterling value of underlying overseas investments to go down as well as up
There can be no guarantee that the targeted yield of 4% will be achieved and therefore such forecasts are not a reliable
indicator of future performance
Please refer to the Fund’s prospectus for more information relating to the Fund.
22
J.P. Morgan Asset Management
Contact
Luke Richdale, Client Portfolio Manager –
Emerging Markets Equities
Emily Whiting, Client Portfolio Manager –
Emerging Markets Equities
 +44 (0) 20 7742 8535
 +44 (0) 20 7742 3508
 [email protected]
 [email protected]
Claire Peck, Client Portfolio Manager –
Emerging Markets Equities
Eric Bian, Client Portfolio Manager –
Emerging Markets Equities
 +44 (0) 20 7742 3512
 +44 (0) 20 7742 4036
 [email protected]
 [email protected]
Please note, telephone lines may be recorded and monitored for security and training purposes.
23
J.P. Morgan Asset Management
This is a promotional document and as such the views contained herein are not to be taken as an advice or recommendation to buy or sell any
investment or interest thereto. Reliance upon information in this material is at the sole discretion of the reader. Any research in this document
has been obtained and may have been acted upon by J.P. Morgan Asset Management for its own purpose. The results of such research are
being made available as additional information and do not necessarily reflect the views of J.P.Morgan Asset Management. Any forecasts,
figures, opinions, statements of financial market trends or investment techniques and strategies expressed are unless otherwise stated, J.P.
Morgan Asset Management’s own at the date of this document. They are considered to be reliable at the time of writing, may not necessarily be
all-inclusive and are not guaranteed as to accuracy. They may be subject to change without reference or notification to you.
It should be noted that the value of investments and the income from them may fluctuate in accordance with market conditions and taxation
agreements and investors may not get back the full amount invested. Changes in exchange rates may have an adverse effect on the value, price
or income of the product(s) or underlying overseas investments. Both past performance and yield may not be a reliable guide to future
performance. There is no guarantee that any forecast made will come to pass. Furthermore, whilst it is the intention to achieve the investment
objective of the investment product(s), there can be no assurance that those objectives will be met.
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You should note that if you contact J.P. Morgan Asset Management by telephone those lines may be recorded and monitored for legal, security
and training purposes. You should also take note that information and data from communications with you will be collected, stored and
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5JP.
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