Emerging Markets - Too Big to Ignore?

At a time when investors are still licking their wounds and questioning their appetite for risk, we believe emerging market (EM) equities are, ultimately, too big for investors to ignore.

Too Big to Ignore? It might not be fashionable to say this today, given the upheaval in financial markets over the past year, lingering economic uncertainties, volatility in most asset classes and plenty of seemingly still-cheap assets around the globe but at a time when investors are still licking their wounds and questioning their appetite for risk, we believe emerging market equities are too big for investors to ignore.

There is a demographic inevitability to Emerging Markets (EM) claiming a rising share of global GDP and growth. The ascent of Anglo-Saxon capitalism over the past 200-plus years has provided a framework whereby the “players” within that model built up significant shares of global GDP. And what recent economic history makes clear is that countries which “join” the capitalist model enjoy steady convergence in GDP per capita toward developed world levels. In our view, it is the “dividend” from globalization that is the “enabler” of such catch-up strategies. This development typically starts with urbanization, which leads to manufacturing growth and infrastructure demand, ultimately paving the way to rising incomes and thereby changes in consumption patterns.

Each of these phenomena has been clearly observable within developing markets over the past decade. Urbanization rates are exploding and as a result, infrastructure demand and scheduled spending on it are substantial and growing. If anything, the pace of this expenditure will only be quickened by the global downturn. Consumption is also evolving in a natural shift from “production” economies to “consumption” economies as incomes rise.

The EM share of global equity indices still notably trails its share of GDP, population, energy consumption etc. However, a pair of significant developments demonstrates that the financial relevance of EM already is starting to catch up with its increasingly obvious economic relevance.

On the macroeconomic side, the shift toward more sound macro policies that J.P. Morgan Asset Management has trumpeted over the past several years—including fiscal probity, inflation targeting replacing exchange rate targeting and external balances steered toward surplus—is not only largely intact, but has left EM in an unusually strong position in the current global cycle.

From a microeconomic perspective, improved operating leverage has led to a sharp rise in EM profits, boosting returns on equity (ROE) to globally competitive levels and forcing the EM share of global corporate profits to new highs. The current global downturn is surely forcing a cyclical correction in EM ROE, just as surely as it is in developed market ROE. But there is little reason to think the improvement in capital discipline underlying the secular rise in ROE will be reversed by the current cycle.

Aside from the risk posed by the deep but temporary compression of earnings, it is worth considering the risks and revelations unfolding in the current cycle.

The first consideration evidenced from the current cycle is that EM economies and equity have not avoided the fallout from what is widely viewed as a financial crisis centered in the developed world. Economies across all regions of the emerging world slowed and while improved fundamentals limited the damage in the bulk of the asset class, isolated instances of structural deficiencies were exposed.

The second consideration resulting from the current cycle is the political sustainability of globalization. The secular benefits of globalization have been apparent during the past half-millennium and have accelerated during the past half-century. Politically, however, the risk of creeping protectionist policies on cross-border trade and capital flows has been heightened by the severity of the current cycle. Arguably, a breakdown in the commitment to globalization represents the biggest risk to the EM growth story. Our assumption is that the worst global downturn in over 70 years will result in only a limited reversal of long-term globalisation trends.

The above combination of factors suggests that EM equity certainly looks too big to ignore for long-term investors. At J.P. Morgan Asset Management, as early investors in the asset class, our award-winning global emerging markets investment team is one of the largest dedicated emerging markets teams in the industry and offers a range of global and regional investment solutions to access the long-term investment potential as well as invest for the recovery.

At J.P. Morgan Asset Management, as early investors in the asset class, our award-winning global emerging markets equities team is one of the largest dedicated emerging markets teams in the industry and offers a range of global and regional investment solutions to access the long-term investment potential as well as invest for the recovery. With an average tenure at J.P. Morgan of over 11 years, the 20 strong Emerging Markets Equity Team located across the world and headed by CIO, Richard Titherington, run global, regional and thematic funds, ranging from: the flagship JPMorgan Funds – Emerging Markets Equity Fund, managed by Austin Forey; to the most recent launches of JPMorgan Funds – Africa Equity Fund, JPMorgan Funds – Emerging Markets Infrastructure Equity Fund and the JPMorgan Funds – Emerging Markets Small Cap Fund.

Important information and risk profile of the funds
Information of the funds, including the risk profile, investment process and main features: Click on the fund names to see the interactive fund factsheet and all the legal documents of each fund (see library).
As the fund invests in equities, investors are exposed to stock market fluctuations and the financial performance of the companies held in the fund portfolio. Therefore, investors may see the value of their investment fall as well as rise on a daily basis, and they may get back less than they originally invested.