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JPM’s Titherington: US bonds are biggest threat to EM

JPM’s Titherington: US bonds are biggest  threat to EM

Richard Titherington (pictured), co-manager of the JPMorgan Emerging Markets Income fund, said the main threat to the region is another bout of turbulence from the US bond market.

‘It is the biggest single risk. So as long as that stays benign, that is a positive for emerging markets. But if we have turbulence that would be a negative,’ said Titherington, who is CIO and head of the JPMorgan emerging markets equity team based in London.

However, he added that the £131 million fund’s income focus could help shield its investors from the worst of any volatility, more so than its generic emerging market counterparts.

‘Obviously we would expect higher yielding stocks to be more stable, because they are more defensive and lower beta. I would generally see them outperforming,’ he added.

Like most of its emerging market peers, the fund has lost money over the year to the end of May, although less than the sector average. It lost 4.3% compared to a 5.8% loss for the MSCI emerging markets index.

‘It’s been a tough year. We have not had very much good news in emerging markets,’ Titherington said.

‘The trend has been against the asset class and I think that is why managers have suffered but the income fund has done better.’

Many emerging market currencies nosedived in 2013, as investors took refuge in the dollar when the announcement of asset price tapering in the US caused a liquidity crunch.

‘Last year, the major problem in emerging markets was currency rather than the equity component. It [the fund] does have exposure to certain currencies, so as long as the currency market is stable I would expect it to perform well,’ Titherington said.

Since the start of the year, emerging markets have rallied, outperforming their developed peers and the manager said he is now seeing renewed enthusiasm for the asset class.

‘Slowly people are coming back. It’s not dramatic but I think the period of outflows is over.’

Launched in the summer of 2012, the fund was designed to appeal to investors who were struggling to find yield in the crowded UK income sector, and nearly three years since launch, it is ‘modestly exceeding’ its 4% dividend target.

The manager noted that last year the focus was on what Morgan Stanley characterised as the ‘fragile five’ – nations that had been weakened by large current account deficits. But this year, things have improved for the likes of Brazil, India, Indonesia, South Africa and Turkey.

‘Now it’s quite a benign environment and they have all turned around. Emerging market currencies are moving up this year rather than down, so from an income standpoint we have seen quite a turnaround in places like Turkey and South Africa.’

Titherington singled out Taiwan as one area where dividend culture is improving. He likes TSMC, a world leader in semiconductor manufacturing. Computer hardware and electronics company Asustek has also benefited the fund, with the stock paying a 5.5% dividend yield.

Titherington has also turned his attention to the Middle East, where he invests in a number of industrial companies. ‘We have a fairly big exposure to companies in the Middle East, which people tend to overlook but pay out a very attractive dividend. There are a lot of interesting things going on there.’

India boasted the top performing stock market in the first half of this year but the fund has been compelled to retain its structural underweight to the country as income is too scarce, while other previously no-go areas like Russia have improved.

‘As a stock market I quite like India but the fact is that Indian companies do not pay out dividends and that is a problem. Russia used to not pay out dividends but that has changed,’ Titherington said.

The biggest sector holding in the fund at the end of May was an 18.6% weighting to financials, including several Chinese banks, despite concerns over the instability of the shadow banking sector.

‘Everyone is scared of them but you can get a 6% dividend yield. There is a lot of concern over these kinds of issues but we only invest in the highest quality banks and we think the dividends are substantial and we are being compensated enough to take that risk,’ he said.

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