EM dividends are here to stay – JP Morgan AM

Added 27th September 2016

If investors want proof that the emerging markets rally has taken root, they should look no further than the sector’s dividend sustainability potential, according to JP Morgan Asset Management’s Omar Negyal.

EM dividends are here to stay – JP Morgan AM

Speaking at an Association of Investment Companies roundtable discussion Negyal, who heads the JPMorgan Global Emerging Markets Income Trust, thinks that the robust performance of EM assets year to date signifies the first leg of the asset class’ recovery.

Recent data from the AIC indicates that the global EM sector has increased by 31% over the year to date at the end of August, which makes it the second top performing AIC sector over the period. By comparison, the wider industry’s average increase was only 9% during the same timeframe. 

“We have seen currencies move, signs that China is stabilising and we have seen some improvement in trade balances across EM,” said Negyal. The turnaround in local currencies is especially noteworthy as these proved a significant headwind for much of the decade, he noted.

Given the bumpy ride the asset class has endured throughout the decade and the broad signs of improvement across these markets currently, Negyal argued that we can finally say that EM is suitable for income. The main reason EM investors can and should view the income generating properties of EM equities is because now we can actually have a conversation about sustainable payout ratios, he said.     

“EM has on average delivered between 30-35% dividend payout ratios for many, many years,” Negyal said. “Even through volatile times, EM companies have demonstrated an ability and willingness to pay dividends throughout the cycle.”

While EM equities are generally far riskier on average than their developed market counterparts, there is a positive link between dividend payout ratios and corporate governance practices, which could help investors better identify positive long-term income opportunities in the sector.

“If I had to put together a ranking of areas in terms of corporate governance, there would be a very high correlation with dividend payouts,” he explained. “Paying out dividends shows that a company wishes to reward minimum shareholders. By focusing on these companies in the EM sector, I think we are raising the bar in terms of the kinds of companies we are investing in and, as a result, are likely to get a better outcome.”

And with over 1000 EM stocks generating a 2% or above yield, and approximately 500 in the sector yielding over 4%, Negyal said investors have a wide enough variety of stocks to be able to build a coherent and diversified portfolio.

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Vincent McEntegart, manager of the Kames Diversified Monthly Income Fund, explains how he aims to deliver a stable and sustainable income of 5% p.a.*, paid monthly, by investing in a range of asset classes

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