Q1. Why do you believe the JPM Emerging Markets Infrastructure is such a compelling investment theme?
Emerging market infrastructure is a long-term theme that offers investors the chance to participate in the ongoing economic development of emerging markets. The rapid industrialisation of many emerging market countries is fuelling a shift from rural to urban populations, as people move to the cities to take advantage of new employment opportunities. Meanwhile, growing demand for emerging market exports has overstretched local infrastructure, which is already weak as a result of years of underinvestment. Emerging economies have a pressing need for increased capacity if they are to maintain and extend their competitive advantage.
As a result, investment in power stations, airports, railways and other infrastructure has become a key priority for regional businesses and governments. Many emerging market countries have undergone meaningful economic and structural reforms over the past decade, increasing their ability to fund large infrastructure investments.
Q2. Has the eurozone crisis impacted the sector or your fund in any particular way?
The eurozone crisis has resulted in turbulence in stock markets around the world. While high levels of government debt are a developed-world problem, emerging markets have not been spared as nervous investors have been less willing to invest in stocks that are viewed as more risky. However, the long-term drivers of the infrastructure theme – and of emerging market growth – are unchanged, and the uncertainty resulting from the crisis has created opportunities to buy attractive companies at cheap prices.
Q.3 How sensitive is the sector to potential spikes in commodity prices?
Rising commodity prices can be both positive and negative for the infrastructure theme. On the negative side, infrastructure development projects are, of course, reliant on commodities, and are therefore vulnerable to rising prices. However, emerging markets are also major producers of commodities, so rising prices can benefit emerging economies and give governments increased scope for infrastructure investment.
Q4. What areas are looking interesting to the team at the moment?
Markets that look interesting at the moment include India and Brazil. In India, share prices look attractive following recent poor market performance, although we remain cautious due to India’s ongoing political issues. However, the political situation is improving slowly and we continue to keep a close eye on developments so that we can take advantage of any opportunities that arise. In Brazil a sharp decline in the value of the Brazilian currency, the real, has been beneficial for high quality industrial companies. A weaker currency means the profits they source overseas are worth more, and their goods are more attractive to customers in different countries. As a result, these stocks have become very interesting, with rising long-term return expectations providing some attractive investment opportunities.
Q5. What do you think the next 12 months holds for the sector/fund?
The infrastructure theme can be divided into two parts: commodity-related stocks, and high quality industrial and utility companies. Although demand for commodities from emerging markets is likely to be fairly resilient given the importance of infrastructure investment to economic development, commodity-related opportunities are likely to be more vulnerable to uncertainty over global growth in the short term. In the fund, we tend to favour the higher quality industrial and utility stocks, which are typically smaller companies that produce products and services that tap into the rapid growth of the emerging market consumer. Although the growth of these companies may slow if the economic backdrop weakens, this is likely only to be a temporary interruption to their significant long-term growth potential.
JPM Emerging Markets Infrastructure Fund
Points to remember
The value of your investment may fall as well as rise and you may get back less than you originally invested.
The value of equity and equity-linked securities may fluctuate in response to the performance of individual companies and general market conditions. Furthermore, participation notes run the risk of counterparty default which may result in the loss of the full market value of the note.
Emerging markets may be subject to increased political, regulatory and economic instability, less developed custody and settlement practices, poor transparency and greater financial risks. Emerging market currencies may be subject to volatile price movements. Emerging market securities may also be subject to higher volatility and be more difficult to sell than non-emerging market securities.
The value of bonds and other debt securities may change significantly depending on market, economic and interest rate conditions as well as the creditworthiness of the issuer. Issuers of bonds and other debt securities may fail to meet payment obligations (default) or the credit rating of bonds and other debt securities may be downgraded. These risks are typically increased for below investment grade and certain unrated securities, which may also be subject to higher volatility and be more difficult to sell than investment grade securities.
The Fund invests in securities of smaller companies which may be more difficult to sell, more volatile and tend to carry greater financial risk than securities of larger companies.
As the portfolio of the Fund is primarily focused on generating income, it may bear little resemblance to the composition of its benchmark.
Movements in currency exchange rates can adversely affect the return of your investment.
This Fund charges the annual fee of the Authorised Corporate Director (ACD) against capital, which will increase the amount of income available for distribution to Shareholders, but may constrain capital growth. It may also have tax implications for certain investors.
The fund may suit investors looking to add a primarily emerging markets equity product that offers income and the potential for long-term capital growth to a diversified portfolio. Given the relatively high volatility of emerging stock markets, investors should look to hold an investment in the fund for five to ten years.
Telephone lines may be recorded for training and monitoring purposes. The information in this document is based on our understanding of law and regulation at the time of print and is subject to change. The value of investments and the income from them may fall as well as rise and investors may not get back the full amount invested. Past performance is not a guide to the future. Issued by JPMorgan Asset Management Marketing Limited which is authorised and regulated by the Financial Services Authority. Investment is subject to documentation (Prospectus, Key Investor Information Document (KIID) and Terms and Conditions), copies of which can be obtained free of charge from JPMorgan Asset Management Marketing Limited. Registered in England No. 288553. Registered Office Address: 25 Bank St, Canary Wharf, London E14 5JP.
The views in this article are that of the author’s and do not necessarily reflect those of Fiducia Wealth Management Ltd.