JPMorgan: We're Shorting Emerging Markets

JP Morgan's multi-asset fund manager Talib Sheikh explains why he is bullish on pharmaceuticals and European telecoms - but not emerging market stocks

Emma Wall 22 April, 2016 | 2:32PM
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Emma Wall: Hello and welcome to Morningstar. I'm Emma Wall and I'm joined today by Talib Sheikh, Manager of the JPMorgan Global Macro Opportunities Fund, to give his three sector picks.

Hi, Talib.

Talib Sheikh: Hi there.

Wall: So, what's the first sector today?

Sheikh: Really, we're looking at high-quality telecom companies across Europe. Many of those dividend yields look quite attractive. But we're not just buying companies as bond proxies. What we are looking for are companies actually that have the ability to grow their earnings, to generate free cash flow and potentially return that to shareholders through their dividends.

And we would argue that telecoms are companies which have really got used to operating in a deflationary or disinflationary environment. There certainly hasn't been much pricing power across the European telecom sector for many years. So, they have got business models which are highly attuned to throwing off free cash flow in a disinflationary environment.

We can get dividend yields of 4% to 4.5% in an environment where the central bank has got interest rates at zero, even negative for many, many years. We think that they are quite attractive. When we look at valuations, they are not hugely cheap, but not hugely expensive either. But clearly, we're just buying them for that free cash flow rather than some explosive earnings growth.

Wall: And how much pressure does the EU put on this sector because as a mobile phone user we've always got used to over the last couple of years getting great text messages and say it's now cheaper to use our phones in Europe. Is that pushing prices down or have we seen the end of that kind of regulatory influence?

Sheikh: Disinflation is seen everywhere across all sectors. I think this is the one area of the market where I guess they have just got used to how you deal with that. As you say, using a mobile phone across Europe virtually free; they need to be innovative in terms of how they are restructuring their business models. They need to be innovative in terms of new services and new data contracts et cetera that they can generate and we would argue that that ultimately flows through into a continued ability to generate free cash flow.

So, we're buying them for stability rather than some huge amount of earnings growth. But more importantly, they have had plenty of years of practice of learning of actually how do you run a business in an environment of flat or falling prices and I think that's really critical.

Wall: What's the second sector today?

Sheikh: We've been pretty optimistic on global healthcare stocks through 2013 and 2014. They got pretty expensive actually into the backend of 2015 and we sold most of our positions. We've reengaged in that position now. We're really looking at global healthcare companies, again an ability to grow free cash flow, a franchise across the global economy and an ability to grow earnings which are no longer connected ultimately to economic growth.

I think that's an important distinction. Clearly, some people say, well, when I look at the U.S. election, in the U.S. election drug prices are certainly something which have been a hot topic and a subject to debate.

But I would argue that a lot of that bad news is probably in the price end. Certainly, we've been reengaging, particularly through January and February, at the start of this year, as we saw prices – as we saw share prices fall, we actually went in and scooped up quite a few companies there where we thought there's some reasonable value in them.

Wall: And I know that you have the ability within your fund to short certain stocks and indeed, certain sectors on the whole and the third sector you'd like to highlight is one case of that, isn't it?

Sheikh: So, we've short really commodity-related plays. We're short the European integrated oil sector. We're also short European industrials. An area which we have been short, we're neutral at the moment, but we've certainly seen a big bounce in emerging market equities, both FX, currencies and also commodity-related plays have had a big move really over the last three months or so as the markets really digested what does Janet Yellen and the Federal Reserve perhaps being a little bit more dovish.

Certainly, when we look at that, we think that some of the bounce has been justified. We're unwilling to trade from alongside though. We would argue that really to get sustained move from here in those emerging market currencies and emerging market equities you need to see growth coming through and I think one of our highest convictions when we look across the global economies is that growth is just really lackluster. And so, that's an area which we like to play from the short side. We've seen it bounce over the last three months and we'd see that as an opportunity, particularly in FX, to reengage in some of those short positions.

Wall: So, don't get too excited about the yen rally?

Sheikh: No, I don't think so. I mean, we know it's de-rated for four years. We could argue that there is some value there. But we just don't really see any earnings coming through. We don't see any economic growth coming through and we'd argue that you really need to see that in order to get excited for a sustainable multi-month and in some cases, multi-year trend.

Wall: Talib, thank you very much.

Sheikh: Thank you.

Wall: This is Emma Wall for Morningstar. Thank you for watching.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
JPM Global Macro Opportunities C Net Acc1.65 GBP0.80Rating

About Author

Emma Wall  is former Senior International Editor for Morningstar

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