The dividend pay-out ratio in emerging markets has proved to be remarkably stable over the past five years
Investment opportunities abound, not only in Asia but also the likes of Brazil and South Africa.

“There is a much greater hunger for income than there has been in the past,” says Whitbread, “owing to the low return world in which we find ourselves. Indeed, today’s low nominal return environment and ageing populations in many developed countries continue to fuel the demand for real income-generating assets – especially as the yields on offer from other traditional income-generating assets, such as property and bonds, currently look so muted.

“There are now more dividend-paying companies in the emerging markets than there are in developed markets; an indication that companies in such markets understand investors’ regard for dividends as well as from capital gains, and also a sign of the challenges faced by many companies in the developed world in generating dividends given higher debt burdens, older workforces and lower growth potential, among other factors.

“Furthermore, the dividend pay-out ratio in emerging markets has proved to be remarkably stable over the past five years, despite significant market volatility, the global financial crisis and the impact of currency fluctuations,” she adds.

Emerging opportunities 

“While some have viewed Asia as the home of a number of the emerging world’s high-quality, dividend-paying companies, there are also plenty of investment opportunities to be found outside the region, in markets such as South Africa and Brazil,” she explains.

“South Africa is interesting in that it displays characteristics of both the developed and the developing world. It boasts companies with highly experienced management teams, which match the standard of those in developed markets, but with greater exposure to the attractive growth opportunities available in emerging markets.

“We are particularly interested in the financial, healthcare and consumer sectors, where companies are meeting the increasing demands of a growing middle class. Furthermore, longer term demographic growth trends suggest a significant growth opportunity across the African continent, with the UN forecasting the Sub-Saharan population to double by 2030. 

“With regards to dividends, South African companies are generally conservative when it comes to debt; this may relate to concerns around the volatility of the rand, inflation and interest rates historically. As a result, they tend to generate higher cashflows while maintaining low levels of debt. 

“Meanwhile, Brazil is also well positioned to benefit from a youthful population and a growing middle class, with increasing disposable incomes.”

She continues, “We are particularly interested in the development of infrastructure across the country, in particular with regard to transport ahead of the World Cup in 2014 and the Olympics in Rio in 2016. President Dilma Rousseff recognises that private investment should play an important role in infrastructure improvement, with some potentially attractive investment opportunities on offer for investors.

“With regard to dividend yields, Brazilian companies listed on the local exchange, BM&FBovespa, are required to maintain a minimum 25% pay-out ratio. This has led to an established dividend culture among the local corporates, with the BM&FBovespa currently yielding over 4%,” she adds.  

6 August 2012 

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Mellon Capital, in its recently published summer outlook, Outlooks and Insights, also reported that global economic activity appears to be returning to very slow growth, below two percent, having lost some of the upward momentum observed earlier in the year.  

“Our proprietary global measure of leading economic indicators has slipped, reflecting modestly weaker values in most developed countries,” said Gabriela Parcella, chief executive officer of Mellon Capital. 

“However, the global leading economic indicators are still showing some growth, although at a sluggish pace.”

Mellon Capital continues to favor equities, based on its assessment of attractive valuations, particularly in light of forecasts of significant earnings growth in many large developed markets, the report said.  The report cautions that financial markets are likely to remain sensitive to unfolding developments in Europe.

“Among the major asset classes, we continue to favor equities, as they are attractive to us in both absolute terms and relative to fixed income,” said Vassilis Dagioglu, managing director and head of asset allocation portfolio management for Mellon Capital. 

“In contrast, we find most fixed income securities provide relatively unattractive valuations and little compensation for even moderate inflation in the future.”

In the US, Mellon Capital said its models favor energy, industrials and information technology stocks over consumer staples and utilities. 

In other developed markets, Mellon Capital said equity markets in the core euro area including Germany, France and the Netherlands appear to offer the best value compared to Asian equity markets.   The report also warned about the earnings quality of some Asian equities.

While Mellon Capital found bonds overall less attractive than equities, the report notes that there are pockets of fixed income opportunities such as German and UK sovereign bonds and corporate and high-yield bonds in the US.  It believes Treasury Inflation Protected Securities (TIPS) are overvalued in absolute terms and versus spread sectors but fairly valued versus nominal Treasuries. 

In its summer outlook, Mellon Capital reduced its inflation forecast target in the US for 2012 to 2.5 percent from the 2.7 percent-forecast made in March. In commodities, Mellon Capital said its model allocation is toward the lower end of its allowed range, as there is ample supply relative to demand and roll yields are negative.

9 July 2012

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