JPMorgan Asset Management, the investing arm of the largest U.S. bank, is preparing for a rebound in emerging-market equities in the second half of this year spurred by improved earnings.
JPMorgan Asset is buying Korean automaker shares hurt by investor concern that a weaker yen will limit their ability to compete against Japanese exporters, Richard Titherington, chief investment officer and head of emerging markets in London, said in an interview. The company favors consumer discretionary stocks with “very low valuations” and has its biggest overweight position in China, he said.
“A strong recovery in the second half” for emerging-market equities will “significantly close the gap” with developed-nation shares, said Titherington, who manages $47 billion in emerging-market stocks. “We’ve entered some of the Korean auto companies where the share prices have fallen sharply when the yen has weakened” on expectation “that’s a temporary headwind,” he said.
The benchmark MSCI Emerging Markets Index has dropped 2.5 percent this year, lagging behind an 8.8 percent surge in the MSCI World Index of advanced-country stocks, as 58 percent of developing-nation companies reported worse fourth-quarter earnings than estimated by analysts, according to data compiled by Bloomberg.
Hyundai Motor Co., South Korea’s biggest automaker, extended its decline to 8 percent this year as the yen reached its weakest level versus the dollar since April 2009 yesterday.
“A weak yen means the dollar is rising,” Titherington said today. “A rising dollar puts pressure on emerging-market currencies and increases the attraction of U.S. assets, thus draining liquidity from emerging markets.”
The yen halted a depreciation today that took it to within 0.2 percent of 100 per dollar after official data showed Japanese investors sold foreign bonds last week.
“The yen is around fair value now, so I would expect this headwind to reverse in the second half of the year,” Titherington said.
The emerging-markets gauge trades at 10.4 times 12-month projected profit, compared with the MSCI World’s 13.6 times. JPMorgan Asset is keeping its portfolios at a “neutral stance relative to the index despite attractive valuations” as currency moves have a bigger influence on the market compared with 2012, Titherington said.
“We are looking at a year where the direction of currencies is going to be at least as important for equity market performance as anything else,” he said. “It increases uncertainty.”