Investing in emerging markets can be a profitable long-term strategy, providing you can handle a bit of volatility.
JPMorgan Emerging Markets Investment Trust (LSE: JMG) is a good example. Over the past five years, its share price has performed more than twice as well as the FTSE 100, though for the first three years it was lagging the index. And looking back as far as 2002, the investment trust has wiped the floor with the Footsie, despite some erratic spells.
The trust released first-half figures on Wednesday, and it’s been another good period for emerging markets as the benchmark MSCI Emerging Markets Index is up 11.3% in sterling terms. JPMorgan Emerging Markets pretty much tracked that with a return on net assets of +11.2%, though the return on the shares was an even better 12% due to a narrowing of the discount.
Volatility
That highlights one reason for volatility from a trust like this when compared to the underlying benchmark. When the benchmark is doing well, more investors are attracted to the trust’s shares and the price rises ahead of it — and the discount to net asset value falls.
Similarly, if emerging markets have a bad spell, I’d expect more investors to sell, emerging markets investment trust discounts to widen, and the shares to underperform a falling market.
Assuming a long-term rising stock market (and I see no reason for emerging stock markets to not follow the same long-term upward trajectory as our familiar FTSE indices), I’d expect a strong performance. And JPMorgan Emerging Markets has actually outperformed its benchmark index over one, three, five and 10-year periods to 31 December 2017.
Chairman Sarah Arkle pointed to a “strong entrepreneurial spirit in China and other emerging economies” as one indicator that such markets will “remain fertile territory for equity investment“. I agree.
Track record
Templeton Emerging Markets Investment Trust (LSE: TEM), which has been investing in emerging markets for decades, provides an even starker example of the volatility you can expect.
For most of the past five years, its shares were badly behind the FTSE 100, falling by more than 40% by the beginning of 2016. But since then, they’ve put on a strong growth spurt to realign with the Footsie. Going back to 1995, we’ve seen a 600% rise in the trust while London’s top index has just about doubled.
If you feel that emerging markets means small upstart companies that may or may not come good, or companies trading in dodgy-looking economies, Templeton Emerging Markets is one that illustrates how wrong that can be. The biggest countries it invests in are China/Hong Kong, South Korea, and Taiwan — all with that same entrepreneurial spirit and with track records of economic growth.
One of the trust’s biggest holdings is Samsung Electronics, and ’emerging markets’ companies don’t come much more internationally successful than Samsung. Brilliance China Automotive Holdings is another big constituent of its portfolio. It has a tie-up with BMW through a joint venture to manufacture and distributes BMW cars in China.
The trust even holds Unilever shares. A lot of investors might not realise that Unilever does far more of its business in Asia and other developing regions than it does here in the UK.
Templeton Emerging also invests in upcoming technology firms, which I think gives it an attractive mix.
