The outlook for emerging markets is hardly encouraging. Eastern Europe is being buffeted by its proximity to the eurozone economy. China’s slowdown is tempering demand for Latin American commodities. And shrinking manufacturing sectors across much of Asia show that “Asia’s trade-dependent economies face a difficult year”, says Capital Economics.
With the prospects for capital appreciation in emerging markets poor, attention is turning to emerging-market income. As Morgan Stanley points out, emerging yields are above their long-term average, with some financials, raw materials and telecoms stocks yielding well over 4%. As elsewhere, high-yielding stocks have done much better longer-term than low yielders.
Dividends have added 2.7% a year to the annual return from emerging markets since 1987: the total annual return since then has been 12.3%, compared to 9.3% in stock price gains alone. The 2.7% extra return is higher than might be expected in a region known largely for fast growth rather than income.
It is also not too far behind Europe’s 4.4% and America’s 4.6% – figures based on returns from 1901 and 1926 respectively. Morgan Stanley also notes that firms in emerging markets currently pay 31% of income out in dividends, compared to their long-run average of 35%. Income-hungry investors should take a closer look at emerging markets.