149. Finding multi-baggers in emerging markets
John Citron, co-manager of JPMorgan Emerging Markets trust, tells us how emerging markets have...
Backed by one of the largest emerging market research teams, Austin Forey, manager of JPMorgan Emerging Markets trust, has delivered excellent returns for more than two decades. He has emphatically demonstrated that his long-term approach to stock picking is successful, as well as the importance of being able to evolve a portfolio to meet changing trends.
In this update, Austin details where the team is finding new opportunities and describes the stocks whose competitive position has endured the decades.
“It is too early to know what the lasting consequences of the pandemic will be,”Austin said. “One reads much about the opportunity that we now have to redraw societal norms, and about the ‘roaring twenties’ as a period of innovation and excess spurred in part by the last great global pandemic.
“Thus far, the experience of the last eighteen months seems likely to exacerbate and extend inequalities in societies around the world, which cannot be good news; yet as recent policy shifts in China show, addressing inequality brings plenty of challenges too.
“More narrowly, this has also been a time of financial experimentation as governments have created unprecedented amounts of liquidity to support economies that were in part simply closed down in an attempt to prevent the spread of infection.
“How that cost, and the debts incurred, will be repaid in the long run remains far from clear. For those countries within our investment universe which already had structural economic vulnerabilities, the pandemic is likely to leave them in a more challenging position still.
“That in itself need not be an impediment to finding good investments, but it does leave us looking more at export-related companies, and at those with a really significant opportunity to take market share.
“Nevertheless, the JPMorgan Emerging Markets Investment Trust has invested through a wide range of conditions over the last three decades, and in the corporate sector there will always be winners to choose and losers to avoid, whatever the economic weather.”
“Fortunately, this is also a period of high innovation and change in the business world, not just in the West, but everywhere,” continued Austin. “The spread of smartphones and the revolution in data they bring for companies is producing an age of unusual disruption and creating some huge winners as well as some significant losers.
“In some places, corporate value seems to be being created faster than ever before, while those businesses on the wrong side of these trends can seem mired in an intractable and possibly terminal decline.
“On the side of the winners lie many companies whose businesses are based on digital technology, but even in more traditional sectors, we are seeing rapid change. Although we have no investments yet to show for it, we have spent considerable time in the last year reviewing companies related to electric vehicles and the associated supply chain, as well as those whose products serve the renewable energy industry.
“It is quite possible that oligopolistic parts of the supply chain will prove a better place to invest than the final assemblers, just as it has in most of the computer industry, and we look forward to opportunities in these areas.”
“Alongside the excitement of the new, however, we need to have some confidence in the familiar and established,” said Austin. “A few of the positions the trust owns have now been in the portfolio for two decades already (for example Taiwan Semiconductor Manufacturing Company and HDFC Bank).
“If you find a great business, it has always seemed to us that you should own it for as long as possible, unless the valuation becomes so extreme compared to all your other choices that you have already realised many years of future value in today’s share price. That does not mean a 10 or 15% premium over fair value – it needs much, much more than that, and the stronger the business, the more it takes.
“So there is a direct correlation between the strength and duration of a company and the length of time for which we are prepared to hold it. Those rare companies whose competitive position endures for a very long time, and which are also able to keep growing, represent the core of the portfolio, for the simple reason that they still offer some of the best combinations of risk and reward that we can find anywhere.”
“Regardless of the ups and downs of markets, regardless of the pandemic even, there is always opportunity somewhere,” concluded Austin. “We count ourselves lucky to work in some of the most dynamic and interesting countries in the world and privileged to act as stewards of your capital.
“It’s always important in investment to keep a clear view of one’s decision hierarchy and recognise what matters the most. For us, that is always going to be the selection of businesses with the potential to create and grow intrinsic value for a long time. If we can record enough successes on that front, most of the rest will take care of itself.”