Dividends Determine Good Governance in Emerging Markets

JP Morgan's Omar Negyal explains how Brazil, South Africa and Taiwan are good stock markets for income seekers

Emma Wall 16 March, 2018 | 7:40AM
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Emma Wall: Hello, and welcome to the Morningstar series, "Why Should I Invest With You?" I'm Emma Wall and I'm joined today by Omar Negyal, Manager of the JPMorgan Emerging Markets Income Trust (JEMI).

Hello, Omar.

Omar Negyal: Hello.

Wall: So, I suppose the first question is regarding income and emerging markets. Because I think for many U.K.-based investors, they are very much in tune with the idea of dividends coming from their local market, maybe even from other developed economies. But when it comes to emerging markets, there may be questions about sustainability of dividends?

Negyal: I think that's a great question, because you're absolutely right that the initial view of emerging markets often isn't connected with income or with dividends. And it's quite surprising to learn that actually emerging markets equities are a great asset class for those investors who are seeking income. I mean, one of the things that we can point to is that payout ratios in emerging markets have actually been held steady for a number of years now.

So, if you look over the last 10 years or so, the payout ratio in emerging markets has been around about 35%. So, a third of earnings being returned to investors through dividends and that's been through some pretty tricky times in terms of economies and how the asset class has developed. And I think that's just one pointer to emerging markets being a place we can look for sustainable yield.

Wall: And investors who are nervous about investing in emerging markets often raise concerns about corporate governance. But I suppose dividends are quite a good indicator of whether a company gets that or not, whether they do actually prioritise shareholders. It's a big tick in that respect.

Negyal: Yeah, I think so. I mean, I think – we have the point that emerging markets is a nice place to look for income, but it's also – the other point that by looking for income in emerging markets, it's actually good way to invest in the asset class because of this direct link, I think, between dividend payouts and corporate governance.

We know there are risks in emerging markets, whether it's from the macro side in terms of the economies or the companies that we invest in, they are a little bit riskier. So, by looking for those companies where we can have conviction in dividend payouts to shareholders, I do believe that's going to give us some kind of tailwind in terms of the kinds of companies that we are investing in across the asset class.

Wall: Now, a lot of equity fund managers say that they are stock pickers. They do not base their investment decisions based on region. But I think when it comes to this case, I would question whether you do end up with certain biases country-wise, because corporate governance is one of those things that perpetuates, right? If your peers are prioritising shareholders, inevitably you will too.

I know Japan is not an emerging market, but we have seen that sort of happen with the so-called Shame Index. Does that happen? Do you find that there are certain markets which are "better behaved" when it comes to shareholders?

Negyal: Yes, I think, there is a broad range of dividend cultures across emerging markets. And I would say that ultimately it does come down to individual stock. So, I am picking stocks from the bottom up and it's about finding the right specific opportunities. But when I do that, it's pretty clear to me that there are certain areas of the market that do lend themselves to a dividend approach.

And we can think of just a couple of examples. I'd highlight Brazil, South Africa and Taiwan, just thinking three different markets across the region. And that's for a variety of different reasons. So, in Brazil, it's the law. It's mandatory for companies to be paying 25% of their earnings out as dividends. So, that's a great starting point for an income-seeking investor.

And then in other markets, like South Africa or like in Taiwan, it essentially comes down to management. So, we see strong management teams in those markets doing things in terms of shareholder value that we like.

So, achieving a good balance between paying out dividends to shareholders with a decent payout ratio but also thinking about reinvestment for growth through retaining some of those earnings to reinvest for the future. And really, that's the ideal combination for us. We are interested in yield, but we are also interested in growing those dividends over time.

Wall: Omar, thank you very much.

Negyal: Thank you.

Wall: This is Emma Wall for Morningstar. Thank you for watching.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
JPMorgan Global Emerg Mkts Inc Ord149.52 GBP1.02Rating

About Author

Emma Wall  is former Senior International Editor for Morningstar