If you want to find robust, long-term dividend payers, look to emerging markets. Matt Williams, senior investment director, Emerging Markets Income Equity Fund, abrdn, explains.
What do you think of when someone mentions emerging market investing? To the uninitiated, emerging markets (EMs) may give an impression of instability and volatility; certainly, EMs might not be perceived as the most obvious place to find stable, long-term dividend-paying companies.
However, with the right research and analysis, there are some really interesting income-generating opportunities in these markets, across a range of countries, sectors and investment styles. Indeed, there are now as many companies paying dividends in EM as there are in developed markets.
The green energy transition, digitalisation and rising consumption are all trends that are spawning growth and innovation in these vibrant, emerging economies. These trends could provide investors with interesting opportunities for years to come. Clearly, some emerging countries are more volatile than others, usually due to political instability, and economic conditions vary widely. Early and significant interest-rate rises have led inflation to peak in much of Latin America, a region that has seen some benefit from higher commodity prices. Meanwhile, the situation is different in China, where interest rates and inflation remain low, as the economy re-opens following lengthy Covid lockdowns. Then there are unique situations such as Turkey, where inflation has rocketed, and Russia, where Western investment has been frozen, or withdrawn, following the conflict with Ukraine.
So, EM investors have to investigate both companies and countries in the emerging-market sphere with great rigour before deciding where the solid prospects can be found. Despite the caveats, there is an ever-increasing number of stable, well-governed nations and well-run companies to be found, including financially strong, income-generating businesses that can also demonstrate robust ESG credentials.
Within the growing digitalisation trend, Samsung Electronics and Taiwan Semiconductor Manufacturing Company (TSMC), for example, are both drivers of the thriving economies in South Korea and Taiwan. As tech hardware companies with growing dividends, they demonstrate important characteristics we look for in growth companies. Taking TSMC as an illustration, a decade ago, the dividend yield was 3% in 2012 and this has grown to 11% dividend yield today when based off the original purchase price. Both companies have strong balance sheets to help maintain investment for the future while leaving enough cash to give shareholders attractive distributions. To strengthen economic resilience, countries like the US are courting these businesses and paying them handsomely to set up production facilities in their territories. These new locations offer diversification, combined with a captive customer base.
ESG considerations
We are mindful of ESG considerations when identifying opportunities and although copper mining and shipping are in pollution- and emissions-heavy industries that investors often shy away from on ESG grounds, it’s crucial that we take a long-term view of these companies, especially as they look set to benefit from the trends around green energy and increased consumption. Take ASEAN shipping business SITC International and the copper mining holding company Grupo Mexico as examples. Every day we see headlines about the transition to green energy and it’s widely known that copper is an essential component as we move towards much greater electrification, so securing good supplies is essential. Shipping is also fundamental to the modern global economy. One of the first harsh lessons the world learned as Covid lockdowns hit, was the fragility of supply-chains. Indeed, it was alarming to see how quickly they were undermined to the detriment of the consumer.
That’s why we choose to be pragmatic and use our active ownership to engage and drive improvements and investment into building more sustainable businesses, so they can lead in decarbonisation when appropriate technologies become commercially available.
Encouragingly, both companies have ambitious medium and longer-term carbon reduction goals, as well as having committed to their industry’s standards and emissions-reduction goals. Indeed, SITC is currently emitting 30% less than its peers due to modern vessels and careful route planning.
Inevitably, some EMs have been less rewarding for investors in recent times. Over the course of 2022, both Russia and China showed that emerging market countries can prove to be more volatile than even investors experienced in these economies may have expected. For this reason, consideration of the macroeconomic background is extremely important for emerging market investors.
However, nearly 40% of companies in EM pay a dividend of over 3%, meaning there’s opportunities for investors willing to research the market carefully. Yes, rising interest rates and high levels of inflation in some companies have brought volatility, but many companies are unaffected or have made the cost adjustments needed. Tighter financial conditions will allow vibrant businesses and even countries to improve their position.
Far from being the riskier asset class, the healthy finances of emerging market assets now contrast starkly with the heavily indebted Western world, and opportunities in emerging markets, especially around green energy, consumption and digital trends, look set to grow.
