JP Morgan: Emerging markets are too big to ignore

Emerging markets are too big to ignore but investors need to drill down to individual country level to find opportunities, says JP Morgan Asset Management.

Despite the sector being out of favour for many, investors should still have an allocation to the region, says Emily Whiting, client portfolio manager for emerging markets and Asia Pacific equities at JP Morgan Asset Management.

“You can no longer talk about emerging markets as a whole, but you should watch their individual composition and that is where we can find opportunities,” she says.

Despite the slow growth in the region, emerging countries still account for 85 per cent of the global population and generate more than 50 per cent of global GDP, according to figures from Bank of America Merrill Lynch.

However, these economies only form 12 per cent of global equity market cap, Whiting says.

“Emerging markets are not all the same. Clearly the oil price drop has been detrimental for many exporters, but, for example, it has been very good for countries such as India, Indonesia and Turkey, which are oil importers,” she says.

On China, which has recently experienced dramatic market falls, Whiting says the slowdown in GDP growth “is to be expected” giving that China is gradually turning into a consumption-led economy rather than investment-driven.

In mid-July Chinese GDP growth was estimated at 7 per cent for 2015, according to the Chinese National Bureau of Statistics.

Whiting says for emerging markets, especially China, investors cannot look for short-term gains, and instead should look at stocks on at least a five-year time horizon. Investing in the region has become “a multi-decade”, rather than just “a multi-year story”, she says.

However, she says investors should remain selective on their emerging market investments. 

She says: “Chinese A-Shares are momentum-driven stocks not fundamentals-driven. Investors should focus on domestic type of products. These companies are now more competitive on a pricing point of view.

“They’ve got private management, are already paying yield and have good governance.”

Whiting cites Midea, a Chinese producer of home appliances and commercial air conditioners, as one example of a company investors should look at in the consumer discretionary sector.

Looking at country-level dividend issuance is another strategy to tap the emerging market region, says Whiting, as dividends offer “an alternative exposure” to emerging markets.

For example, Russia started paying dividends up to 21 per cent and in US Dollar, while there are “very growth-oriented” Indian companies with dividend payout ratios of up to 28 per cent, according to MSCI figures.

Saudi Arabia is particularly one to watch on the dividend story, forming part of the “untapped” frontier markets, says Whiting, as it has the largest dividend payout ratio of 57 per cent.

“Saudi Arabia has a lot of growth opportunities and although it is not part of the MSCI index yet, it will probably move to it in 2017,” she says.