Each week, a professional investor tells MoneyWeek where he’d put his money now. This week: Richard Titherington, chief investment officer, Emerging Market Equities, JP Morgan Asset Management.
Emerging markets are a highly volatile, cyclical asset class. You need only look at the divergence in total returns across emerging-market countries this past year – compare Russia (a major loser) to India (a big winner), for example – to see this volatility in action. So investing in emerging markets can make for a bumpy ride.
But this volatility also creates opportunities – in particular, the compelling income opportunities on offer in emerging markets tend to be overlooked by investors. Yet dividend per share growth of emerging-market companies has beaten that of developed markets, even though emerging-market earnings growth has been weaker.
By prioritising income, investors can fish in a better-quality pond of emerging-market companies – those that choose to keep the interests of shareholders in mind. Better yet, emerging-market dividend stocks are cheaper than those in developed markets.
Those with high yields are trading well below their historical average valuation right now, whereas US and European high-yielding stocks are trading at higher-than-average valuations.
We split emerging-market income stocks into three main categories. High-growth companies with a low yield historically make up about 20% of our strategy, although currently that’s closer to 10%.
Then there’s the so-called bread-and-butter component – this is characterised by sound companies with a mixture of sustainable, higher-than-average dividends and strong earnings growth. Finally, there are higher-yielding companies with little or no growth and heightened sensitivity to interest-rate changes.
We can rotate exposures to various types of companies depending on the interest-rate outlook. For example, we have brought down our relative weighting to the highest-yielding equities, which function similarly to bonds in that they are more sensitive to interest-rate increases, and shifted towards more cyclical companies.
While cyclical companies do tend to be vulnerable to negative emerging-markets sentiment, certain stocks look attractive, given their valuations. We look for a combination of cheap currency valuations and strong dividend yields. Current examples include the following.
Taiwanese technology group Delta Electronics (Taiwan: 2308) is an innovative industrial technology company and plug manufacturer. It falls squarely into the bread-and-butter category cited above – it has a 20-year history of cash dividend payments. The dividend is expected to grow at a low double-digit rate this year. The stock currently yields 3.2%.
Russian materials group Norilsk Nickel (London International: MNOD) is the world’s largest, lowest-cost nickel producer globally, with a large reserve base. It currently yields 7.7% and is meeting its dividend targets. Its revenues are all generated in US dollars, meaning the company is a beneficiary of the significant falls in the rouble.
Ambev (NYSE: ABEV), Latin America’s largest brewer, is a stock we’ve owned since we launched this strategy. It has a 70% market share in Brazil, the world’s second-largest beer market, so it is well positioned for growth. It has a rising payout ratio (in other words, it’s paying more of its profits out as dividends) and earnings growth is expected to be in the high single digits this year. It currently yields 3.9%. Ambev’s exposure to various markets means it is less affected by currency fluctuations.