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From the experts - Emerging markets

Charlie Awdry

Are dividends from Emerging Markets worth the risk?

Henderson Global Equity Income and Henderson International Income Trust funds manager Ben Lofthouse, looks at equities from Emerging Markets and the associated risks.

​The latest Henderson Global Dividend Index (HGDI) report – a long-term study into global dividend trends based in US dollars – shows how dividends from Emerging Markets (EM) have declined in headline terms* during the last two years, in stark contrast to their significant growth between 2009 and 2013. The trend supports the view that taking a global approach to equity income, with the flexibility to access growth opportunities and seek out attractive yields, is important to help reduce an investor’s reliance on any one region or sector.

*Headline dividends reflect the total sum of payouts received within the HGDI in US dollar terms. Underlying dividends are adjusted for special dividends, changes in currencies, timing effects and index changes.

Dividends from the EM more than doubled in headline terms between 2009 and 2013 (+114.4%), which compares favourably to the 45.1% rise in dividends globally. Since the start of 2014, however, payouts from companies listed in the EM have fallen at a headline level by 17.9%, while global dividends have risen by 8.8%.

Source: Henderson Global Dividend Index, data at 31 December 2015. Edition 9, February 2016

Meanwhile, on the monetary side, despite six rate cuts since November last year, real interest rates are still at elevated levels, meaning there is room to further lower policy rates. As China spends it foreign exchange reserves supporting the renminbi, we expect further cuts to the banks’ reserve requirement ratio (RRR) to offset the enforced liquidity drain.

 

Henderson Global Dividend Index – Emerging Markets v Global headline growth
Source: Henderson Global Dividend Index, Edition 9, February 2016

 

A heavy weighting of commodity companies, which have suffered from weak demand leading to many implementing dividend cuts, along with falling emerging market currencies are mainly responsible for the EM dividend decline since 2014. China is the largest EM dividend payer, making up more than a quarter of the HGDI EM total (27%), as shown in the chart below.

 

Emerging Markets – 2015 dividends split by country
Source: Henderson Global Dividend Index, Edition 9, February 2016

 

Dividends from Chinese companies have almost tripled since 2009 at a headline level, far outperforming the EM and global average. But growth stalled in mid-2014 and since then Chinese dividends have fallen in headline terms for the first time since the HGDI was introduced in 2009. A limited number of commodity companies, however, and a managed currency mean Chinese dividends have declined less than those from other EM countries.

 

Henderson Global Dividend Index – China’s headline dividend growth
Source: Henderson Global Dividend Index, Edition 9, February 2016

 

Over the long term, exchange rate effects broadly even out but the impact in 2015 was exceptional and reflected the US dollar’s strength. Last year headline dividends from EM declined by 8.3% but underlying growth was strong at 12.7% (year-on-year). Exchange rate effects accounted for 18% of the difference, with the impact greatest in Russia and Brazil, while the remaining 3% was down to special dividends and index changes.

Henderson Global Equity Income strategy

The geographical allocation of the Henderson Global Equity Income strategy is a function of where the managers find attractive stocks with good fundamentals and appealing valuations rather than being based on an overarching macro view. Ben Lofthouse, Co-Manager within the team, comments:

“Currently, we are finding the most attractive stock opportunities for both capital and income growth in developed markets. The outlook for earnings and dividends remains uncertain in many EM markets whereas most developed markets offer the potential for dividend growth.

While the strategy has a low direct weighting to EM, exposure is also achieved through certain developed market companies with significant emerging market business streams.”

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