Annual Report 2017

Investment Strategies

Emerging Markets Equities

JOHCM Emerging Markets Equities

Our Global Emerging Markets Opportunities portfolios make investments in emerging markets based on views at the country level.

We have three emerging market equity strategies, with two of these having distinctly contrasting investment approaches. Our London-based Global Emerging Markets Opportunities (GEMO) team believes investment in emerging markets goes right or wrong at the country level. Accordingly, the team follows a predominantly top-down approach, meaning country selection forms the basis of portfolio construction.

In contrast, our Prague-based Global Emerging Markets (GEM) team favours a bottom-up stock picking approach centred on earnings momentum, typically generating outperformance through stock views rather than country or sector selection. The team analyses individual companies, focusing on growth and on businesses that have the potential to develop world-class products or become industry leaders in local markets.

In 2014, the GEM team launched a small cap version of the all-cap strategy. This has enjoyed marked investment success, powered by highly positive stock picking. The 2017 Financial Year saw the strategy's encouraging start continue with robust security selection in China contributing to significant outperformance, compared to its benchmark over the 12 month period.

The GEMO team is particularly positive on India. Central bank policies have brought down inflation and the government is expected to provide financial support for the economy ahead of the 2019 election. In addition, the team considers Prime Minister Modi’s administration to be the most pro-reform government in any emerging market right now, and view some of the policies (e.g. tax reform, infrastructure investment and improvement) as providing a direct and visible uplift to economic growth.

Elsewhere, the team also likes the attractively-valued South Korean market, seeking exposure to a cyclical uplift to economic growth in the country, with non-commodity exports being a key driver. High household indebtedness remains a drag on domestic demand growth, but adding to the bull case is the fact that the Korean Government has substantial policy options, both fiscal and monetary. The Korean won seems likely to continue to depreciate against the currencies of key trading partners, as easier monetary policy reduces interest rates at a time when Japan, in particular, is struggling with currency strength. The team is also positive on the prospects for change in the corporate governance environment.

In contrast, the GEMO team is more bearish on China, having long felt that the credit stimulus applied to the Chinese economy in mid-2015 would have negative side effects and would ultimately prove to be unsustainable. The very rapid increase in private-sector credit/GDP poses substantial risks to equity holders in the financial system. The team expects Chinese economic growth to slow as stimulus is withdrawn and view the crackdown on shadow banking as creating further growth risks to the downside. From an investment perspective, apart from banks, Chinese equities are not particularly attractively valued, and the team prefers to be positioned elsewhere, most notably in India, South Korea and Taiwan.

For the GEM strategy, opportunities within the technology sector have been plentiful. In the portfolio, top performers include Sunny Optical, a Hong Kong-listed lens-maker which supplies smartphone manufacturers with camera lenses. As competition increases amongst high-end smartphone manufacturers and developments into dual-lens cameras take place, Sunny Optical has enjoyed significant demand increases and the share price has reflected this.