A dilemma faced by investors with income as a priority for most of the past decade has been that many of the stocks with the most attractive income characteristics were also those in the most economically sensitive parts of the market, meaning income investing became fraught with risk.
Tom Kynge, portfolio analyst at Sarasin and Partners, says a feature of emerging market equities in recent years has been that it is the most defensive parts of the market that pay an income.
He says: “Emerging market equities also screen as good value from a dividend yield perspective when compared to developed markets.
"Traditionally, using an equity income style in emerging market can be seen as a relatively defensive way of gaining access to emerging market equity risk. This strategy has been relatively successful over the past decade given the bias towards higher-quality companies that are less likely to use leverage.”
Kamil Dimmich, emerging market equity investor at North of South, acknowledges that it is somewhat counter-intuitive to think of emerging markets as central to an income investment portfolio as economies and companies that are described as 'emerging' should have the bulk of the their growth ahead of them, rather than now, and so it would be a smarter use of the capital generated to deploy it on ensuring that future growth opportunity is captured, than on paying out in dividends today.
This general view of the merits of growth companies, in any jurisdiction was summed up by James Anderson, the former managing partner at Baillie Gifford, who described dividends as “being what happens when a company runs out of ideas.”
But despite this view, Kimmich actually launched an emerging markets income fund last year.
Explaining the rationale for this, he says: “Governance among emerging market companies is improving, and therefore so is the propensity to pay dividends. It is much improved on five to 10 years ago. Companies in places such as Taiwan have big cash piles now.”
Apples or pears?
Jonathan Toub, a fund manager at Aviva Investors, says in developed markets the choice is increasingly between buying companies that can grow or companies that can pay a dividend, while in emerging markets “one can invest in companies that are both growing and capable of paying dividends.”
Arun Sai, senior multi-asset strategist at Pictet Asset Management, says the picture is a bit more nuanced as he feels many of the companies that should be paying dividends are those which are commodity producers, and notes the “more tech focused” businesses would be better served by not paying dividends.
But he says that in general “emerging markets are at different stages of development, and so should not be treated the same way.”
If the income case for emerging markets is closely linked to the commodity price, Charlie Bond, emerging market equity investor at Invesco, says commodity prices could be on a longer-term upward trend, as he notes “there has been a structural under-investment in many areas of the commodity market for many years, and so we are constructive on commodity prices as a result.”
