Emerging market stocks have demonstrated ability and willingness to pay dividends consistently despite volatile times in recent years, according to a top-rated investor.
At a conference in London chaired by the industry body the Association of Investment Companies this week Omar Negyal, from JPMorgan, said income investors should consider emerging markets.
“Many years ago you would not be possible to look at this asset class for income. But they are suitable for income now, with sustainable pay-out ratios. Emerging market companies on average have had dividend pay-out ratios of 30% to 35% for many years now,” says Negyal, manager of the Bronze Rated JP Morgan Global Emerging Markets Income trust (JEMI).
The dividend pay-out ratio is the number of dividends paid to shareholders relative to the amount of total net income of a company.
And the yields are attractive relative to developed markets; there are more than 1,000 companies in emerging markets paying out a dividend yield of more than 2% and 508 of them are paying yields greater than 4%, according to data provided by JP Morgan.
While risks still exist investing in emerging markets, Negyal said there was a strong correlation between corporate governance and dividend pay-out ratios, of which provide insight to investors looking for terms of long term income opportunities.
“I can make judgements on how sustainable a yield is on a five year view by understanding the dividend policy of a company, whether they use cash to pay dividends, the way they generate profits and whether they can remain profitable,” Negyal says.
“We know that volatility in the market will affect earnings. But investors should look at long term dividend perspectives.”
Carlos Hardenberg, manager of Templeton Emerging Markets (TEMIT) agrees, adding that there are pressures on emerging market companies to ensure dividends are sustainable.
“Investors often underestimate that until today, the majority of emerging markets companies’ shareholders were domestic investors. For them, dividends are just as important as for overseas investors,” says Hardenberg.
He illustrated his point by recalling an investor conference he attended in Lagos of which a local pension investor stood up and questioned the board when the company did not pay the dividend that was expected.
Emerging Market Recovery So Far
This year emerging markets have rallied, thanks to a stabilising Chinese economy, a tailwind from currency movement, and improvements in trading.
The global emerging markets sector in average has gained 30% from the year to the end of August, according to data provided by Association of Investment Companies.
Dan Kemp of Morningstar Investment Management said that emerging markets are generally attractive with the highest valuation-implied returns coming from many in the Europe, middle-east, Africa region. Emerging market Europe, which is not known for its strong dividend profile, is currently offering a 3.9% yield versus a 20-year average of 2.4%.
Against that backdrop, Negyal reminded investors that this is just the start of emerging market recovery. There are concerns, as company earnings have yet to rally with share prices. However, Negyal is confident that over the long term, there are growth opportunities in emerging markets.
Taiwan and South Africa Offer the Best Dividends
Taiwan and South Africa provide many attractive dividend ideas thanks to their positive dividend culture, says Negyal.
“Taiwan has dividend pay-out ratio of 50%, meaning returns on capital are positive and they generate healthy cash flow every year,” he said.
Hardenberg echoes Negyal’s views, saying that Taiwanese companies can benefit greatly from the recent China stabilisation and are run by individuals who understand global landscape very well.
“Many current innovations in China actually originate in Taiwan,” Hardenberg said.
In contrast, although the Korean market features of a lot of famous companies such as Samsung and Hyundai, their dividend story remains a challenging one, said Negyal. Korea and Russia pay the lowest out to investors in emerging markets.
Don’t Go Passive for Emerging Exposure
Investors are turning to exchange-traded funds (ETFs) that tracks the MSCI emerging market index. Investors poured in €1.3 billion in August alone into ETFs that track global emerging market equity indices, according to data compiled by Morningstar Direct. It recorded the second largest inflows across all sectors in August. From January to August this year, the asset class recorded €5.5 billion inflows.
However, Hardenberg warned that by buying emerging markets index funds investors fail to maintain diversification in their portfolios.
“As MSCI will include soon include China A shares and Chinese companies listed in the US, the weighting of the index in China will grow to 50%,” Hardenberg said.
“If you are buying 50% of one country, to me, that’s a case of putting all your assets in one basket.”
Both managers believe China remains a primary headwind for global growth economy and believe the Chinese financial system especially should be avoided by investors.
