Where are the Opportunities in Emerging Markets?

VIDEO: Improving corporate governance, decent earnings and growing dividends make emerging markets attractive, says JPMorgan's Omar Negyal 

Holly Black 11 February, 2020 | 10:16AM
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Holly Black: Welcome to the Morningstar series, "Why Should I Invest With You?" I'm Holly Black. With me is Omar Negyal. He is Manager of the JPMorgan Emerging Markets Income Fund. Hello.

Omar Negyal: Hello.

Black: So, I'm guessing that kind of does what it says on the tin, but I'll ask the question, what does the fund do?

Negyal: You're right. It does what the name says Emerging Markets Income. We want to deliver an attractive level of yield to investors and also participate in the growth of emerging markets. So, what that really means is investing only in dividend-paying stocks across emerging markets, and you want to achieve a yield that's at least 30% higher than the broader market.

Black: What is the broader market yield?

Negyal: So, today, emerging markets has a yield of around about 3%.

Black: Okay.

Negyal: So, the yield that we're aiming for is somewhere about 4% and we're comfortably achieving that in the portfolio today.

Black: So, I think most investors might be surprised to find you can get an income fund option in emerging markets because we traditionally think of this as a faster growth area. Is that because the landscape has changed or is that because we've all been wrong for years?

Negyal: I think it has changed. So, let's say, over the last 10 years, we can definitely see this development and emergence, if you like, of a dividend culture in emerging markets. And if you look over the last 10, 15 years, actually, you've now got a nice history of a remarkably stable payout ratio in emerging markets. So, the ratio between dividends compared to earnings is around about 35% in emerging markets, and that's been pretty stable for a long time, even through what has been quite a turbulent time sometimes in emerging markets. So, emerging market companies on average are certainly demonstrating that they've got both an ability but also willingness to pay dividends to shareholders.

Black: So, is this driven by improving governance? Or is this because companies are maturing so they don't have to just pump all their money back into the system?

Negyal: I think the governance point is actually really interesting one. And I think one reason we think that dividend investing in emerging markets is a really positive way to invest in this asset class is almost a direct link I make between dividend payout and the governance of companies. So, dividends – obviously, there's all sorts of signals that you get when a management team decides to pay a dividend. But probably the most important signal you're getting is that the management team wants to reward minority shareholders. And that signal is really, really important for us in terms of finding the right kinds of stocks in emerging markets. So, the fact that more and more companies in emerging markets are doing that, I think, is a really positive sign. And it's also a nice way of finding the right kinds of companies to invest in.

Black: So, what is the outlook for the region this year because I think maybe it's not been that interesting for investors for a few years when they could get really good growth just by investing, say, the S&P?

Negyal: I think we're looking for, certainly, at least a stabilisation in earnings in emerging markets having been through a tough period. And we're starting to see signs that earnings can actually start to recover from what has been, as you say, a pretty turbulent time in the asset class. And from a fund perspective, what we tend to look at is pretty long-term trends. So, yes, we're interested in what's happening this year in terms of earnings and what's happening there. But really, we try and take a five-year view in terms of where both earnings and dividends are going for the companies that we look at. And that's really what I'm focusing on, where we can find trends in companies for the long term.

Black: And do you have to pay attention to the macro at all because emerging markets are quite disparate, so they're not all doing the same thing? Do you ever pile into one country or avoid another?

Negyal: So, we don't take explicit top-down views. It's a very bottom-up driven strategy. It's all about finding the right companies, but obviously we don't operate in a vacuum. And it depends where the companies are based. And what we tend to find is there are some natural areas of emerging markets where we can find income compared to the rest of it. So, I mentioned earlier that there's this average power ratio of 35% in emerging markets, it's a nice starting point. But when you look a little bit closer at different markets within emerging markets, there's actually a pretty wide range of those payout ratios. So, there's some markets where naturally companies are paying more if they've got a better dividend culture, if you like. And so, we tend to be able to find more opportunities there. And then, there's a few other countries where it's harder to find those and so, naturally, we tilt away from those markets in terms of finding the right opportunities.

Black: Super. Well, thank you so much for your time.

Negyal: Thank you.

Black: And thanks for joining us.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Holly Black  is Senior Editor, Morningstar.co.uk