UK Edition
Investing in shares is rarely a smooth or stress-free journey. It is filled with periods of disappointment and doubt that can prompt less experienced investors to give up. However, in Questor’s view, it is imperative to stay the course with high-quality investments that offer great capital growth potential over the long run.
Emerging markets, for example, have experienced a very challenging year thus far.
China’s zero-Covid policy has acted as a major drag on performance; it is largely responsible for a sharp slowdown in the country’s economic growth rate, which declined from an annualised 4.8pc in the first quarter to just 0.4pc in the second.
Partly as a result, China’s stock market has slumped by 14pc since the start of the year. It and other emerging markets have also been affected by weaker investor sentiment, which has prompted capital to flow to less risky locations.
The Federal Reserve’s hawkish monetary policy has also caused concern over the repayment and servicing of emerging market debt following the vast stimulus it produced in response to the pandemic.
Importantly, China recently announced a partial easing of its stance towards Covid. Like the rest of the world, it seems to be realising that zero-Covid is impossible to achieve and is not worth the severe economic consequences.
Since the country accounts for more than a quarter of the MSCI Emerging Markets index, its new stance suggests that a more buoyant period could be ahead for developing markets.
Indeed, the country’s economic growth has already bounced back to an annualised rate of 3.9pc in the third quarter. The IMF forecasts that China will grow by 3.2pc this year and by 4.4pc next year. Other developing economies, such as India, are also expected to outperform the developed world substantially in 2023.
Together, emerging markets are forecast to grow by 3.7pc next year against just 1.1pc for advanced economies.
This bodes well for emerging market investment trusts such as one of this column’s previous recommendations, JP Morgan Emerging Markets. It has fallen by 19pc this year, but has still outperformed the MSCI Emerging Markets index over the past decade.
In fact, its annualised return is more than two percentage points greater than that of its benchmark index at 6.6pc against 4.2pc. This may sound small but compounded over years it is significant indeed.
Moreover, the trust has gained 31pc since our tip in October 2018. The FTSE 100 has managed a rather paltry 4pc rise over the same period.
The trust offers significant long-term capital return potential from its current price in this column’s view. For one thing, it trades at a 12pc discount to net asset value, which is greater than its three-year average discount of 8pc.
Although its assets are spread across a variety of developing markets to reduce risk and offer access to a range of growth opportunities, Chinese and Indian shares account for around 45pc of its holdings, so it is well placed to benefit from their buoyant economic outlook.
The fund has not been hit particularly hard by the sell-off in Russian assets that took place in the aftermath of the invasion of Ukraine. The trust had a small position of less than 1pc of its net assets in Russian stocks, although these holdings were subsequently written off.
Its “bottom-up” or “stock-by-stock” approach to investing gives it scope to deviate materially from the country and sector weightings of its benchmark index if necessary.
Like most emerging market funds, the JP Morgan Emerging Markets trust is likely to be more volatile than its developed market counterparts. Likewise, its dividend yield of 1.3pc is never going to make it an appealing option for income investors.
However, with China and India poised to spearhead emerging markets’ growth, its shares offer a favourable risk/reward opportunity. Their discount to net asset value suggests that now is an opportune moment to buy them, while existing investors with a long-term view should stay the course to realise even greater returns.
Questor says: buy
Ticker: JMG
Share price at close: 103.8p
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