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JPM's Titherington: US recovery a risk for EM equities

JPM's Titherington: US recovery a risk for EM equities

What is good for the world may be negative for emerging market equities, that's the view of JP Morgan's CIO and head of emerging market equities, Richard Titherington.

‘One of the risks to the emerging market story is, ironically, that the US economy and stock market do better than expected,’ said Titherington.

A pick up on both fronts, he says would hasten the end of QE, contribute to a stonger US dollar and attract capital out of emerging market equities, into US equities.

While this scenario is negative for emerging markets. Globally it’s positive, says Titherington.

Since October 2009, Titherington has managed the JP Morgan Emerging Market Opportunities fund with Amit Mehta. He also manages the JP Morgan Emerging Markets Dividend fund recognised available to Singapore-based investors with a monthly payout share class.

While aware of risks, Titherington is positive on emerging market equities as a whole, saying: ‘Emerging market equities are pretty attractive right now, and there’s a broad theme across emerging markets. Essentially, what we investing in is rising incomes across emerging markets.'

'That’s the key driver to arguably the whole asset class. So when you can find exposures to that, and where valuations are attractive, that’s where you want to be. That’s very much the case in China.’

As at end-January 2013 China is the fund's largest overweight.

Portfolio Holdings

Based on end-January 2013 factsheets, China makes up 26.9% of the portfolio, versus the 18.8% of the benchmark. To understand the rationale behind this overweight, one needs to have some knowledge into the investment process of the EM equity team.

Four-pronged approach

When generating investment ideas, Titherington combines the four perspectives from which the EM equity team. ‘There are different research outputs of the EM equity team. We have a top down view, a bottom up view, a fundamental view, and a quantitative view. So a high-conviction idea is one that appears attractive from as many perspectives as possible,’ he says.

Explaining the overweight in China, Titherington notes: ‘China, we like from top down, we think the market is cheap, fundamental analysts think certain stocks are attractive, and our quantitative work reinforces that message.'

'So from all four perspectives we have a positive view, and it’s essentially saying Chinese equities are cheap and the outlook for earnings is better than consensus. Many people are sceptical about Chinese banks for example, and while their concerns are perfectly valid, the equities were particularly cheap towards the end of last year and we saw a strong rally in Chinese banks in December of last year (2012).’

Avoiding value traps

Samsung Electronics (at 3.7% of the portfolio’s assets) and Taiwan Semiconductor (3.5% of portfolio assets) are the top two holdings, both of which are part of the Asia IT sector.

‘In the electronics sector there is a huge distinction between winners and losers, and you have to be very careful to avoid value traps. We see Samsung and TSMC as long term winners gainers of market share and consequently we expect them to surprise on the upside on earnings. Any issues around the weakening yen we see as short term, and cyclical, and not affecting the structural attractions of both stocks.’

Titherington is more cautious on markets which are expensive, with Mexico and Philippines as two markets he feels are unattractive from a valuations standpoint. ‘Economically, I agree with the optimistic view about the economic story, but I think prices have already reflected the optimism.’

Performance Since October 2009

Since taking up the fund in October 2009, Titherington has steered the JPM Emerging Markets Opportunities to strong outperformance. From end-October 2009 to end-February 2013, the fund has returned 42.45%, while the benchmark returned 24.42% over the same period.

Titherington believes quality and stock selection have been key to performance, saying, ‘I think the key contributor has been the strategy combines a quality approach to stock selection and a value bias to country allocation.

Value as a style hasn’t performed that well over the last three years, but quality has done very well. The primary contributor to performance over the past three years, is stock selection. There have been times during that period when asset allocation added a lot of value - for example buying India at the end of 2011 added a lot of value - but generally stock selection is key.’

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