Emma Wall: Hello, and welcome to Morningstar. I'm Emma Wall and here with me today to give his three stock picks is Omar Negyal, Manager of the JP Morgan Emerging Markets Income Trust (JEMI).
Hello, Omar.
Omar Negyal: Hello.
Wall: So, what's the first stock you'd like to highlight today?
Negyal: The first example is Midea (000333), which is a stock listed in China. It's a Chinese A share. This is very interesting because it's a market that didn't used to be open to foreign investors. But in the past few years, it's been opening up and it's been an area that we've been meaningfully increasing exposure to. And it's a very exciting market for us, because it's the kind of place where we can find the kinds of dividend yield and dividend growth ideas that we are interested in.
So, Midea is a very simply company. It's a white goods manufacturer. It makes fridges, aircons, washing machines, those sorts of things and this is a very domestic market in China. So, it's one of the top three producers. It's got a strong brand. And what we really like about the company is the management team.
We think this management team has pushed the company into a high level of profitability, which we've seen for many, many years now, and it's always innovating. It's always thinking about how to maintain that level of profitability. And of course, very important for me, the dividend track record is very positive one. So, we have here a combination of a good dividend yield from the stock and also an outlook in terms of healthy dividend growth for the future.
Wall: Now, China is, as we all know, the most populated country in the world. But is it enough for a company such as this just to have eyes on the domestic market? Or is it looking outside of the borders into broader Asia?
Negyal: I think the market is deep enough that they can sustain a healthy level of growth. And really, here we are talking about the upgrading cycle. People are getting richer, they are getting wealthier. They want better products in their homes and this is what this company is addressing. But it does also have international aspirations. It does do exports. It's looking at trying to promote its brands outside China as well.
Wall: And what's the second stock today?
Negyal: The second stock is Itau (ITUB3), which is a large Brazilian bank. This is a stock that I bought last year for the fund. And the key reason I bought it was because of the management meetings that we've had with the company which really highlighted the great balance that I think they are achieving between thinking about dividends for shareholders and retaining capital to be able to grow in the future. And again, it's that great combination of yield plus growth that we are really looking for.
So, we had a series of meetings with management last year which really went in depth into how they think about managing that dividend and how they think about managing their capital, something that really, really impressed me and I think something that was being ignored by the market in terms of the valuation levels. And that's why we are very excited about that opportunity today.
Wall: And how linked is the financial stock such as this to the underlying domestic economy, because Brazil has had some ups and downs in recent years?
Negyal: Yes, you're right. And Brazil is emerging from what has been a pretty bad time economically. So, we have had a time when not only economics but also from the political front things looked difficult for Brazil. I think today we are set for more of a recovery from that. So, things look more positive from a cycle perspective.
Wall: And what's the third and final stock?
Negyal: So, the third stock is TSMC, that's Taiwan Semiconductor (2330), one of the largest holdings in the Trust. What we really like about this company is the focus on shareholder value. This company has demonstrated over many, many years that it really wants to maintain a high level of profitability and we judge that by return on capital.
It's maintained that for a very long time. And they have also rewarded shareholders by paying a dividend consistently and a dividend that's growing very nicely over time. And our view is that that continues, the economics of this business are very, very strong, it's dominant in what it does in terms of semiconductor production. We think that's likely to continue which is well set for the dividend.
Wall: Omar, thank you very much.
Negyal: Thank you.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
