Half-year Report to 31 Jaanuary 2020

RNS Number : 1126J

JPMorgan Glb Emerging Mkts Inc Tst

07 April 2020

 

LONDON STOCK EXCHANGE ANNOUNCEMENT

JPMORGAN GLOBAL EMERGING MARKETS INCOME TRUST PLC

UNAUDITED HALF YEAR RESULTS FOR THE SIX MONTHS ENDED 31ST JANUARY 2020

Legal Entity Identifier: 549300OPJXU72JMCYU09

Information disclosed in accordance with DTR 4.2.2

CHAIRMAN'S STATEMENT

Performance

The six months to 31st January 2020 continued to be dominated by the US-China trade tensions, fears of a hard Brexit and a global slowdown. Just as indications began to emerge in January that risks were fading and things might improve, the threats of an outbreak of coronavirus (Covid-19) overshadowed the global news flow.

During the half year, the Company's benchmark, the MSCI Emerging Markets Index (with net dividends reinvested, in sterling terms) recorded a total return of -4.0%. Compared with that, the Company's net asset value return was -4.9%. The total return to shareholders was -9.1%, reflecting a widening of the discount to net asset value at which the Company's shares trade, from 1.0% at the previous financial year end to 5.4% at the half year end.

The principal reason for the Company's marginal underperformance against the benchmark was due to being geared in declining markets. The Investment Managers' Report reviews the Company's performance in more detail and comments on the investment strategy.

Dividends

In the Company's current financial year, the Board has declared two interim dividends of 1.0p each, in line with the same period last year.

As highlighted in the Investment Managers' Report, the emergence of the current coronavirus pandemic has impacted every investor globally. Whilst our portfolio's companies tend to be relatively more stable in terms of business models, return-on-equity premium and cash-flow generation compared to the broader market, they are not immune to the negative impact of the virus and will face challenges to their revenue generation this year. The Board continues to monitor dividend receipts recognising that there is growing pressure on some companies' ability to pay dividends for the rest of 2020 and into 2021. It discusses the outlook and potential sensitivities, particularly with respect to the level of Sterling, with the investment team, on a regular basis.

Share Repurchases and Issuance

During the six months to 31st January 2020, the Company's share price traded at an average discount to net asset value of 4.1%. The Company did not undertake any share repurchases, nor did it issue any shares during the reporting period.

Outlook

Against the backdrop of the fall in equity markets and extremely elevated current market volatility, there are significant uncertainties about the prospects for global economic growth and the scale of effect on corporate returns from the coronavirus. Since the half year end, the Company's net asset value and share price have fallen sharply, along with the markets and benchmark. To 31st March 2020, the net asset value per share and the share price had fallen to 106.3 pence and 98.8 pence respectively. The discount had widened further to 7.1%. However, your Investment Managers invest for the long term and believe that emerging markets still provide interesting opportunities to invest in companies with good long-term capital and dividend returns prospects. The Investment Managers, supported by the extensive research resources of JPMorgan, will continue their strategy of investing in a diversified portfolio of relatively high-yielding stocks with strong fundamentals that also have the potential for long-term growth. The Board has confidence that the Investment Managers will continue to display disciplined stock selection and that businesses held within the portfolio will generate attractive long-term returns for shareholders. The Board also feels reassured by the robust business resilience of the Manager in this difficult environment.

Sarah Fromson

Chairman  7th April 2020

INVESTMENT MANAGERS' REPORT

Introduction

In what proved to be another testing period for the global economy, the Company's return on net assets in the six months to 31st January 2020 was -4.9%, lagging the return of our benchmark, the MSCI Emerging Markets Index, which returned -4.0%.

The backdrop for the review period was one of sluggish economic growth around the world. International trade tensions - particularly those between the United States and China - continued to rumble on and dominated news flow for most of the period. The dispute only faded from the headlines in January when global news outlets began focusing on the emergence of the coronavirus (COVID-19). Although this remains a developing story at the time of writing, we already know that this public health crisis will have an enormous human cost, whilst the repercussions for the global economy will only become clearer over time; however, the virus has already prompted a dramatic reduction in industrial activity globally, with businesses badly disrupted.

Spotlight on regions, stocks and sectors

China remains our largest country exposure and was also the largest relative detractor to portfolio returns over the period. US-China trade relations remained tense, not only hampering Chinese manufacturing but also thrusting the global economy into slowdown. China is attempting to refocus its economy on domestic consumption and regional trade in order to be less vulnerable to international trade politics, but it remains the world's biggest manufacturer. As such, trade collisions between it and the US (the world's two largest economies) are unsettling and have unnerved stock markets and manufacturers. Moreover, recalibrating an economy of this size to emphasise services and consumption over exports cannot happen overnight. More recently, the impact of the coronavirus has seen a meaningful economic slowdown in China, with exports plummeting in the first months of 2020. This, in turn, has significant implications for supply chains around the world.

The Company's negative performance relative to the benchmark was caused by a mixture of stocks that we do own and others that we do not. E-commerce retailing giant Alibaba performed well over the period and its absence from our portfolio held back the Company's relative performance this time around. This is a stock that we do not own because it offers no dividend yield so does not fit our income-driven investment criteria. Nevertheless, its size means that Alibaba's share price return over any given period has a significant negative or positive impact on the Company's relative performance.

Moving to a stock that we do own, Shanghai-based China Pacific Insurance (CPI) is the country's third largest insurer and signalled its plans to spearhead international expansion, including a proposed listing in the UK, selling global depositary receipts. Although we generally like China's Insurance sector - and it is a market where the potential for insurance demand is huge - we are disappointed by CPI's direction of strategic travel and have reduced our investment position accordingly.

We have a large active country exposure to Taiwan and the portfolio's Taiwanese stocks (particularly in the technology arena) contributed positively to overall performance. Our largest holding, Taiwan Semiconductor Manufacturing (TSMC) announced a significant increase in capital expenditure, in order to expand its factories and maintain its competitive edge over rivals. TSMC's move is a tangible example of the higher demand being seen by companies operating in the electronics/semiconductor space, driven by the likes of 5G, high performance computing and Artificial Intelligence. Vanguard International Semiconductor and Novatek Microelectronics are other stocks to have broadly benefitted from these demand drivers. Significantly, these stocks are still generating high levels of free cash flow and distributing attractive dividends, making them compelling investments for an income fund like ours.

Mexico was another positive area for us and one that we added to during the review period, primarily via Banorte. Our top ten holding in Kimberly-Clark de Mexico has continued to perform well for us. In aggregate, we now have more than 10% of assets invested in Mexico (up from 7.5% at 31 July 2019). The political and economic backdrop remains uncomfortable, with the economy under pressure in 2019 and some concern over government policy direction, but this is a market where we believe we can find some good quality income stocks at cheap valuations, relative to historical standards, where dividends look relatively resilient.

Portfolio changes

We have made only modest changes to the portfolio over the review period, consistent with our policy of investing for the long term and benefitting from the continued dividend streams of the companies we hold. In essence, once we invest in stocks that meet our investment criteria, we aim to hold on to them, unless valuations get very extreme, our investment theses change or the rare occasion arises when one of our investee companies announces a direct dividend payout ratio disappointment.

One of Mexico's largest commercial banks, Banorte was a new acquisition during the review period, as referenced above. Despite the challenging economic backdrop in Mexico, Banorte is dividend-focused and well-managed, and we believe its long-term outlook is positive. We summarise our purchase as a good value opportunity to buy a holding offering an attractive dividend yield. We also bought Indonesia's

market-leading Bank Rakyat, which we consider another quality business and where we expect to see significant growth in its loan book, as a result of the Indonesian government's accommodating fiscal policies designed to stimulate the economy.

Another new addition to the portfolio was China's Joyoung, a manufacturer of small kitchen appliances such as soya milk machines, rice cookers and blenders. We like Joyoung's brand positioning, its strong focus on the consumer and its solid dividend track record.

We added to our investment in India's Tata Consultancy Services because the business provided more visibility on potential dividend delivery; this has increased our conviction in owning this strong software franchise, one of India's largest companies.

Financials remains our largest sector exposure - in both absolute and active terms. Our exposure here features banks, insurance companies and stock exchanges. Having invested in both Banorte and Bank Rakyat during the period, we rotated out of other holdings to avoid increasing our overall Financials exposure further. As well as reducing our investment in Brazil's BB Seguridade Participacoes, we sold out of Thailand's Siam Commercial Bank (SCB) altogether. In the latter case, our decision to sell was an acknowledgement that we had underestimated both competition within Thailand's banking sector as well as the costs involved in delivering SCB's bold digital transformation plans.

Additionally, over the last six months we reduced exposure to strong technology performers on higher valuations. These included trimming our holdings in three of our Taiwanese stocks; the aforementioned TSMC and Novatek Microelectronics as well as Mediatek.

Energy remains an underweight sector exposure for us, as we are looking to invest in companies which can deliver sustainable income streams. The cyclicality of energy names means there are typically more attractive opportunities elsewhere.

Our engagement on Environmental, Social and Governance (ESG) issues

We pay particular attention to issues that could affect the prospects for stocks within the Company's portfolio. We draw a direct link between the dividend policies of companies and our views on governance, i.e. a direct demonstration of a desire to return cash to shareholders is a tangible and positive governance indicator. We have engaged with many companies on this issue over time, trying to better understand companies' motivations and aims in terms of their capital allocation.

Environmental and social issues are also extremely important in ensuring business models are sustainable and we are seeing more emerging market companies explicitly addressing this. For example, Samsung Electronics has established an ESG team reporting to its Chief Financial Officer which monitors issues such as the environmental impact of its supply chain and labour relations issues. Our overriding view is that companies that address these issues positively and proactively are more likely to have sustainable business models for the future.

Outlook - staying focused on the long term

In economic, market and political terms we are in uncharted waters. During the period we had begun to see tentative signs of emerging market companies' earnings outlooks starting to stabilise and improve, after the difficult period in which US-China trade tensions had dented both investment and consumption patterns. However, the emergence of the coronavirus pandemic provides a very different context and has already impacted every investor - wherever in the world they are.

Quite apart from the human cost of the pandemic, it is clear that China and other global economies are experiencing a 'sudden shock' due to the pause in economic activity as a result of containment measures. China has experienced a sharp economic slowdown so far in 2020. Whilst we see this as a cyclical decline rather than a structural trend, the nature of this unfolding story makes it very difficult to judge the likely timing and magnitude of the slowdown. We expect market volatility to remain elevated throughout the year. 

We adopt a long-term view in analysing both earnings and dividends and we position our portfolio to capture this. We are not looking to tactically reduce investment positions because of the coronavirus. From a dividend receipts perspective, we acknowledge that the virus outbreak could pose a challenge this year. Companies' near-term sales, profits and cash flow will be negatively affected, and this could impact dividends. As a reminder, emerging market companies generally base their dividends on a pay-out ratio, so earnings cycles do matter. The portfolio's companies tend to be relatively more stable in terms of business models, return-on-equity premium and cash-flow generation compared to the broader market, but we will not be immune from these concerns.

Whilst mindful of the challenges associated with the current virus issues, we avoid making portfolio decisions on a short-term, tactical basis: we remain focused on our long-term aim of investing in sound businesses, selecting stocks on their fundamental qualities - returns on capital, free cash flow and dividend policies. We believe this puts us in a good position to navigate through the current turbulence. We remain confident in the potential of the Company's portfolio to deliver long-term capital and dividend returns.

Omar Negyal

Jeffrey Roskell

Amit Mehta

Investment Managers  7th April 2020

INTERIM MANAGEMENT REPORT

The Company is required to make the following disclosures in its interim report.

Principal Risks and Uncertainties

The principal risks and uncertainties faced by the Company have not changed and fall into the following broad categories: investment and strategy; financial; corporate governance and shareholder relations; operational and accounting, legal and regulatory. Information on each of these areas is given in the Business Review within the Company's Annual Report for the year ended 31st July 2019.

Related Parties Transactions

During the first six months of the current financial year, no transactions with related parties have taken place which have materially affected the financial position or the performance of the Company during the period.

Going Concern

The Directors believe, having considered the Company's investment objectives, risk management policies, capital management policies and procedures, nature of the portfolio and expenditure projections, that the Company has adequate resources, an appropriate financial structure and suitable management arrangements in place to continue in operational existence for the foreseeable future and, more specifically, that there are no material uncertainties pertaining to the Company that would prevent its ability to continue in such operational existence for at least twelve months from the date of the approval of this half yearly financial report. For these reasons, they consider there is reasonable evidence to continue to adopt the going concern basis in preparing the financial statements.

Directors' Responsibilities

The Board of Directors confirms that, to the best of its knowledge:

(i)  the condensed set of financial statements contained within the half yearly financial report has been prepared in accordance with FRS 104 'Interim Financial Reports' and gives a true and fair view of the state of the affairs of the Company and of the assets, liabilities, financial position and net return of the Company, as at 31st January 2020, as required by the UK Listing Authority Disclosure Guidance and Transparency Rules ('DTR') 4.2.4R; and

(ii)  the interim management report includes a fair review of the information required by DTR 4.2.7R and DTR 4.2.8R.

In order to provide these confirmations, and in preparing these financial statements, the Directors are required to:

• select suitable accounting policies and then apply them consistently;

• make judgements and accounting estimates that are reasonable and prudent;

• state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; and

• prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business;

and the Directors confirm that they have done so.

For and on behalf of the Board

Sarah Fromson

Chairman  7th April 2020

STATEMENT OF COMPREHENSIVE INCOME

FOR THE SIX MONTHS ENDED 31ST JANUARY 2020

	(Unaudited)			(Unaudited)			(Audited)
	Six months ended			Six months ended			Year ended
	31st January 2020			31st January 2019			31st July 2019
	Revenue	Capital	Total	Revenue	Capital	Total	Revenue	Capital	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
(Losses)/gains on investments
held at fair value through
profit or loss	-	(25,178)	(25,178)	-	(3,426)	(3,426)	-	33,262	33,262
Net foreign currency
gains/(losses)	-	1,758	1,758	-	168	168	-	(1,746)	(1,746)
Income from investments	5,578	-	5,578	6,555	-	6,555	22,199	-	22,199
Interest receivable and similar
income	45	-	45	40	-	40	75	-	75
Gross return/(loss)	5,623	(23,420)	(17,797)	6,595	(3,258)	3,337	22,274	31,516	53,790
Management fee	(617)	(1,439)	(2,056)	(614)	(1,432)	(2,046)	(1,257)	(2,934)	(4,191)
Other administrative expenses	(338)	-	(338)	(357)	-	(357)	(725)	-	(725)
Net return/(loss) before
finance costs and taxation	4,668	(24,859)	(20,191)	5,624	(4,690)	934	20,292	28,582	48,874
Finance costs	(135)	(313)	(448)	(144)	(335)	(479)	(279)	(651)	(930)
Net return/(loss) before
taxation	4,533	(25,172)	(20,639)	5,480	(5,025)	455	20,013	27,931	47,944
Taxation	(519)	-	(519)	(682)	-	(682)	(2,440)	195	(2,245)
Net return/(loss) after
taxation	4,014	(25,172)	(21,158)	4,798	(5,025)	(227)	17,573	28,126	45,699
Return/(loss) per share (note 3)	1.35p	(8.47)p	(7.12)p	1.62p	(1.69)p	(0.07)p	5.92p	9.47p	15.39p

STATEMENT OF CHANGES IN EQUITY

FOR THE SIX MONTHS ENDED 31ST JANUARY 2020

	Called up		Capital
	share	Share	redemption	Other	Capital	Revenue
	capital	premium	reserve	Reserve1,2	reserves	Reserve2	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000
Six months ended
31st January 2020 (Unaudited)
At 31st July 2019	2,973	222,582	13	100,605	87,222	17,573	430,968
Net (loss)/return	-	-	-	-	(25,172)	4,014	(21,158)
Dividends paid in the period (note 4)	-	-	-	-	-	(9,215)	(9,215)
At 31st January 2020	2,973	222,582	13	100,605	62,050	12,372	400,595
Six months ended
31st January 2019 (Unaudited)
At 31st July 2018	2,968	221,988	13	101,113	59,096	14,336	399,514
Net (loss)/return	-	-	-	-	(5,025)	4,798	(227)
Dividends paid in the period (note 4)	-	-	-	-	-	(8,904)	(8,904)
At 31st January 2019	2,968	221,988	13	101,113	54,071	10,230	390,383
Year ended
31st July 2019 (Audited)
At 31st July 2018	2,968	221,988	13	101,113	59,096	14,336	399,514
Issue of new shares	5	594	-	-	-	-	599
Net return	-	-	-	-	28,126	17,573	45,699
Dividends paid in the year (note 4)	-	-	-	(508)	-	(14,336)	(14,844)
At 31st July 2019	2,973	222,582	13	100,605	87,222	17,573	430,968

1 The balance of the share premium was cancelled on 20th October 2010 and transferred to the 'other reserve'.

2 These reserves form the distributable reserve of the Company and may be used to fund distributions to investors via dividend payments.

STATEMENT OF FINANCIAL POSITION AT 31ST JANUARY 2020

	(Unaudited)	(Unaudited)	(Audited)
	31st January 2020	31st January 2019	31st July 2019
	£'000	£'000	£'000
Fixed assets
Investments held at fair value through profit or loss	426,559	415,992	456,203
Current assets
Debtors	770	3,433	1,364
Cash and cash equivalents	3,838	1,579	6,314
	4,608	5,012	7,678
Current liabilities
Creditors: amounts falling due within one year	(15,400)	(209)	(245)
Derivative financial liabilities	-	(4)	-
Net current (liabilities)/assets	(10,792)	4,799	7,433
Total assets less current liabilities	415,767	420,791	463,636
Creditors: amounts falling due after more than one year	(15,172)	(30,408)	(32,668)
Net assets	400,595	390,383	430,968
Capital and reserves
Called up share capital	2,973	2,968	2,973
Share premium	222,582	221,988	222,582
Capital redemption reserve	13	13	13
Other reserve	100,605	101,113	100,605
Capital reserves	62,050	54,071	87,222
Revenue reserve	12,372	10,230	17,573
Total shareholders' funds	400,595	390,383	430,968
Net asset value per share (note 5)	134.8p	131.5p	145.0p

STATEMENT OF CASH FLOWS FOR THE SIX MONTHS ENDED 31ST JANUARY 2020

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended		Year ended
	31st January 2020	31st January 2019		31st July 2019
	£'000	£'000		£'000
Net cash outflow from operations before dividends
and interest	(2,892)	(2,358)		(4,547)
Dividends received	5,844	7,093		20,832
Interest received	41	37		69
Overseas tax recovered	(1)	-		-
Interest paid	(452)	(445)		(880)
Net cash inflow from operating activities	2,540	4,327		15,474
Purchases of investments	(39,861)	(24,911)		(59,570)
Sales of investments	44,161	26,775		60,316
Settlement of forward currency contracts	(41)	17		48
Net cash inflow from investing activities	4,259	1,881		794
Dividends paid	(9,215)	(8,904)		(14,844)
Issue of new ordinary shares	-	-		599
Net cash outflow from financing activities	(9,215)	(8,904)		(14,245)
(Decrease)/increase in cash and cash equivalents	(2,416)	(2,696)		2,023
Cash and cash equivalents at start of period	6,314	4,275		4,275
Exchange movements	(60)	-		16
Cash and cash equivalents at end of period	3,838	1,579		6,314
(Decrease)/increase in cash and cash equivalents	(2,416)	(2,696)		2,023
Cash and cash equivalents consist of:
Cash and short term deposits	2,755	423		2,185
Cash held in JPMorgan US Dollar Liquidity Fund	1,083	1,156		4,129
Total	3,838	1,579		6,314

RECONCILIATION OF NET DEBT

	As at		Other	As at
	31st July 2019	Cash flows	non-cash charges	31st January 2020
	£'000	£'000	£'000	£'000
Cash and cash equivalents
Cash	2,185	1,135	(565)	2,755
Cash equivalents	4,129	(2,683)	(363)	1,083
	6,314	(1,548)	(928)	3,838
Borrowings
Debt due within one year	-	-	(15,172)	(15,172)
Debt due after one year	(32,668)	-	17,496	(15,172)
	(32,668)	-	2,324	(30,344)
Total	(26,354)	(1,548)	1,396	(26,506)

NOTES TO THE FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED 31ST JANUARY 2020

1.  Financial statements

The information contained within the financial statements in this half year report has not been audited or reviewed by the Company's auditors.

The figures and financial information for the year ended 31st July 2019 are extracted from the latest published financial statements of the Company and do not constitute statutory accounts for that year. Those financial statements have been delivered to the Registrar of Companies and included the report of the auditors which was unqualified and did not contain a statement under either section 498(2) or 498(3) of the Companies Act 2006.

2.  Accounting policies

The financial statements are prepared in accordance with the Companies Act 2006, United Kingdom Generally Accepted Accounting Practice ('UK GAAP') including FRS 102 'The Financial Reporting Standard applicable in the UK and Republic of Ireland' and with the Statement of Recommended Practice 'Financial Statements of Investment Trust Companies and Venture Capital Trusts' (the 'SORP') issued by the Association of Investment Companies in October 2019.

FRS 104, 'Interim Financial Reporting', issued by the Financial Reporting Council ('FRC') in March 2015, and updated in March 2018, has been applied in preparing this condensed set of financial statements for the six months ended 31st January 2020.

All of the Company's operations are of a continuing nature.

The accounting policies applied to this condensed set of financial statements are consistent with those applied in the financial statements for the year ended 31st July 2019.

3.  Return/(loss) per share

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	31st January 2020	31st January 2019	31st July 2019
	£'000	£'000	£'000
Return/(loss) per share is based on the following:
Revenue return	4,014	4,798	17,573
Capital (loss)/return	(25,172)	(5,025)	28,126
Total (loss)/return	(21,158)	(227)	45,699
Weighted average number of shares in issue during
the period	297,240,161	296,790,161	296,892,079
Revenue return per share	1.35p	1.62p	5.92p
Capital (loss)/return per share	(8.47)p	(1.69)p	9.47p
Total (loss)/return per share	(7.12)p	(0.07)p	15.39p

4.  Dividends paid

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	31st January 2020	31st January 2019	31st July 2019
	£'000	£'000	£'000
2019 fourth interim dividend of 2.1p (2018: 2.0p)	6,242	5,936	5,936
2020 first interim dividend paid of 1.0p (2019: 1.0p)	2,973	2,968	2,968
2019 second interim dividend paid of 1.0p	n/a	n/a	2,968
2019 third interim dividend paid of 1.0p	n/a	n/a	2,972
Total dividends paid in the period/year	9,215	8,904	14,844

5.  Net asset value per share

	(Unaudited)	(Unaudited)	(Audited)
	31st January 2020	31st January 2019	31st July 2019
Net assets (£'000)	400,595	390,383	430,968
Number of shares in issue	297,240,161	296,790,161	297,240,161
Net asset value per share	134.8p	131.5p	145.0p

JPMORGAN FUNDS LIMITED

7th April 2020

For further information, please contact:

Divya Amin

For and on behalf of

JPMorgan Funds Limited

020 7742 4000

ENDS

A copy of the half year report will be submitted to the National Storage Mechanism and will shortly be available for inspection at www.morningstar.co.uk/uk/NSM  

The half year report will also shortly be available on the Company's website at www.jpmglobalemergingmarketsincome.co.uk where up to date information on the Company, including daily NAV and share prices, factsheets and portfolio information can also be found.

 

END

 

 

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