Commodities cause divergence in emerging markets

JPMorgan Emerging Market Investment Trust says countries with commodity exposure continue to benefit in the current market environment, while oil dependent countries are lagging behind energy rich neighbours.

The MSCI Emerging Markets Index rose 1.8% in GBP terms in May, the second consecutive monthly gain. Year to date the asset class is down -2.2%, modestly outperforming developed markets.

However, the headline performance within emerging markets disguises the distinct divergence in the fortunes of the various emerging market regions as investors shied away from regions which are heavily dependent on commodities e.g. Turkey and Egypt, while continuing to invest in the markets which are seen as the greatest beneficiaries of the continuing high prices of commodities e.g. Brazil, Russia and Argentina.

The emerging markets team found that Russia rode the wave of buying on the back of higher oil and metals prices. However, they do not expect this recent accelerated rally to be sustained over the long term, but confirm the seamless transition of power to a new Russian president and new prime minister has maintained investor sentiment. The team does expect infrastructure and commodities within the region to continue to have positive effects on investment opportunities.

The team identified that investors are starting to retreat from countries where inflation and high oil prices are most detrimental as they expect energy prices will continue to hit new highs.

The emerging market team manages the JPMorgan Emerging Markets Investment Trust and JPMorgan Russian Securities. The JPMorgan Emerging Markets Investment Trust's share price has increased 20.5% over one year, 165.1% over three years and 414.0% over five years, while the trust's net asset value (NAV) has increased 19.8% over one year, 147.1% over three years and 345.3% over five years. The investment trust's benchmark, the MSCI Emerging Market Free Index, has returned 26.6%, 131.2% and 266.4% respectively.
During the recent divergence of emerging markets, the team found stock selection and asset allocation in Taiwan and Korea were the greatest contributors to returns during the period. From an asset allocation perspective, overweights in Mexico and Brazil and an underweight in Malaysia benefited the investment trust and investments in China and South Africa also had a positive impact on performance.

Claudia Barrulas, Client Portfolio Manager for JPMorgan Emerging Markets Investment Trust said, "Despite global concern over economic slowdown, emerging markets as a whole are still out performing developed countries. The main drivers are domestic demand and consumption growth coming from within emerging markets. Infrastructure spending and commodities have been playing an important role and are part of a theme that we expect to continue to deliver over the mid to long term across all regions."

Looking across the regions, the MSCI Latin America index turned in another strong month rising 9.3% (GBP), driven by particularly strong performance from Argentina (+15.8%) and Brazil (+11.6%) during May, as follow-on buying continued after the country's sovereign debt was upgraded by a second ratings agency, Fitch, making it eligible for more international investors. The worst performer in the month was Chile (-1.6%), as the country struggles with continued shortages of energy and the impact of a historically strong currency.

The largest regional laggard during May was emerging Asia, which fell -4.1%. As the key consumer and importer of a number of commodities, Asia is suffering from rising inflationary concerns.