THIS IS AN ADVERTISING FEATURE
Matthias Siller, Head of EMEA at Barings, outlines why UK-based investors should be considering the emerging markets of Eastern Europe, the Middle East and Africa to bring a new dimension to their income strategy.
In these times of ultra-low interest rates and equity dividend reductions, where can UK-based income seekers look to help boost their portfolio yield? Some might be looking at higher-yield UK bonds, seeking to earn a higher coupon in return for taking on more credit risk. Others may explore alternative or less liquid assets such as property, infrastructure or hedge funds.
But how about emerging market equities?
EMERGING MARKETS: FROM GROWTH MAKERS TO INCOME GENERATORS
Emerging markets may seem a surprising candidate when looking for a regular equity income. But a host of factors are leading many companies in the world’s younger markets to focus on delivering regular returns to their shareholders. And these factors are particularly evident in the less-considered emerging markets of Eastern Europe, the Middle East and Africa [EMEA].
Here we take a quick look at why the Emerging EMEA region - and a fund like Barings Emerging EMEA Opportunities PLC - can make a compelling addition to a UK investor’s income strategy.
DIVIDEND OPPORTUNITIES ARE EVIDENT ACROSS A RANGE OF SECTORS
A combination of economic recovery, greater capital efficiency and improved regulation is helping to drive dividend growth opportunities across a number of sectors, as it enables companies to pay out more of their earnings to shareholders. As Figure 1 shows, key markets across the emerging EMEA region have seen steady improvements in dividend payments since mid-2016. There has also been a sharp dividend recovery since the height of the COVID-19 pandemic in mid-2020.
SHAREHOLDERS ARE BENEFITING FROM STRENGTHENING GOVERNANCE AND BUSINESS MODELS...
Most EMEA countries and their local exchanges have adopted accountancy/transparency standards and minimum requirements to rival their Western counterparts, which is helping to attract international investors and improve market liquidity.
Likewise, many EMEA companies themselves are striving to be more transparent, more shareholder-focused and generally better run. Russian fintech company Tinkoff is a good example. The company recently cancelled its voting system that gave founder Oleg Tinkoff effective control over the company. The share price rallied significantly upon the announcement as investors applauded this major advance in corporate governance.
Emerging EMEA companies choosing to return more cash to shareholders range from Turkcell - Turkey’s leading mobile company, to PZU - Poland’s largest and oldest insurer, to X5 - Russia’s biggest supermarket chain. As further improvements in corporate governance lead to greater capital efficiency, we believe dividend pay-out ratios in these markets can continue to rise.
...AND NOT JUST IN PUBLIC LIMITED COMPANIES
What’s really interesting is that this shift isn’t just happening in companies primarily owned by private investors. The emerging EMEA region has a sizeable number of state-owned entities which are also looking to improve corporate culture, rein in corruption and incentivise long-term value generation.
For example, Sberbank is Russia’s largest lender and majority state-controlled. It is successfully transforming into a modern financial platform and e-commerce ecosystem, driving long-term growth and increasing dividend pay-out ratios. Sberbank is now among the top three banks in Europe by market capitalisation, and even managed to distribute a dividend during a pandemic-stricken 2020.
EMEA CYCLICAL STOCKS SET TO HAVE RESILIENT CASHFLOWS...
As elsewhere in the world, some of the highest dividend paying companies are the traditionally ‘cyclical’ companies whose fortunes tend to be closely tied to the ups and downs of the economic cycle. Typical cyclical stocks are energy and basic materials producers.
In emerging EMEA, however, the cashflows of these companies tend to be less cyclically exposed than their developed market counterparts, which again may be good news for income seekers. This is in part due to their lower levels of debt. Also these companies benefit from a natural currency hedge: revenues are received in US dollars, but costs are met in local currency. So when, for example, the Ruble or Lira depreciates, costs fall.
A good example of this is oil and gas company Lukoil. Substantial efficiency improvements have allowed the company to increase its dividend per share (in US dollars) over the last decade more than two-fold - and that’s happened in an environment of falling oil prices.
...WHILE GROWTH COMPANIES ARE ALSO PROVING CASH GENERATIVE
At the other end of the corporate spectrum are the so-called growth stocks - those companies that are riding the wave of innovation or benefiting from major structural shifts in consumer needs or behaviour. The Emerging EMEA region is proving to be a rich hunting ground for such companies, particularly in e-commerce, fintech and other internet-related services (where companies are at a much earlier stage of growth than in developed markets). Given the accelerated shift to online shopping, banking and working in the wake of COVID-19, many of these companies are reporting substantial increases in underlying cash generation. Again, this is good news for income seekers.
LOW CORRELATION OFFERS VALUABLE DIVERSIFICATION
As we’ve often explained, many companies in Emerging EMEA tend to be more domestically focused, rather than primarily exporting to other countries. As such, they are less affected by events in other markets. In turn, their stock markets tend to demonstrate lower correlation with both Europe and global markets generally.
The significance to income seekers? A carefully selected portfolio of Emerging EMEA stocks can balance out your equity exposure in more mature (and more correlated) markets. For example, if your portfolio is, say, heavily exposed to UK equity income, this region could help provide a useful balance.
BARINGS EMERGING EMEA OPPORTUNITIES PLC - BUILT FOR GROWTH AND INCOME
Our strategy’s key objective is to deliver capital growth from a carefully selected portfolio of Emerging EMEA companies. But alongside this, we’re focused on generating an attractive level of income for investors, via the dividends generated by the companies in our portfolio. Additionally, we have the flexibility to pay out up to 1% of the portfolio’s net asset value as income. So, if we ever need to use capital to supplement income, we have the tools to do so. As at February 2021, the company has a healthy dividend yield of 3.4%.1
TARGET SUSTAINABLE INCOME FROM DYNAMIC MARKETS
We believe all the features outlined here make Barings Emerging EMEA Opportunities PLC a compelling option for any investor seeking strong income as well as capital growth potential. By focusing on quality companies in the world’s less researched yet fast-changing markets, you can discover another way to harness the long-term income potential of equities in a low interest rate world.
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Barings Emerging EMEA Opportunities PLC
Finding quality companies from Emerging Europe, the Middle East and Africa
1 Dividend Yield is an estimated historic annualised yield based on actual distributions over the last 12 months.
Investment involves risk. The value of any investments and any income generated may go down as well as up and is not guaranteed. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. Changes in currency exchange rates may affect the value of investments. Emerging markets or less developed countries may face more political, economic or structural challenges than developed countries. Coupled with less developed regulation, this means your money is at greater risk. Any investment results, portfolio compositions and or examples set forth in this document are provided for illustrative purposes only and are not indicative of any future investment results, future portfolio composition or investments. The document is for informational purposes only and is not an offer or solicitation for the purchase or sale of shares in the Company. It is recommended that prospective investors seek independent advice as appropriate. The Key Information Document (KID) must be received and read before investing. This and other documents, such as the prospectus, latest fact sheet, annual and semi-annual reports, are available from www.bemoplc.com Although every effort is taken to ensure that the information contained in this document is accurate, Barings makes no representation or warranty, express or implied, regarding the accuracy, completeness or adequacy of the information. Baring Asset Management Limited, 20 Old Bailey, London, EC4M 7BF, United Kingdom. Authorised and regulated by the Financial Conduct Authority. Date of issue: April 2021.
