For Ewan Thompson, manager of emerging markets and India funds at Liontrust, a “goldilocks” situation is possible for the asset class this year, and in that scenario, would be very positive for emerging market income stocks.
The goldilocks scenario he envisages is “a mild recession in the US, which keeps the dollar relatively weak but isn’t damaging enough to hurt global growth, so emerging market assets grow.”
Emerging markets growth occurring at the same time as dollar weakness would increase the relative attractiveness of the income earned by emerging market businesses in their own currencies, as the income from dollar-denominated assets, and particularly from US government bonds, falls in relative value.
Rates of change
In terms of how to get emerging markets income in the most efficient way right now, Kevin Thozet, a member of the investment committee at Carmignac, says: “One of the advantages emerging market economies have right now is that because they put interest rates up to combat inflation some time ago, if they need to stimulate economies due to a global downturn, they can do so.
"And the equities that benefit from lower interest rates in emerging markets are generally the same as those which benefit in developed markets. So for example, one would expect utility stocks to do well.”
Utility stocks typically perform well when interest rates are being cut because investors view the income from utility companies as being almost as safe as the income from bonds or cash. So if the income from bonds or cash falls, then the income from utilities increases in relative attractiveness.
Another of the issues often cited by sceptics of the investment case for emerging markets is the level of corporate governance, specifically around the treatment of minority shareholders and the propensity for controlling family shareholders to pay dividends.
But Omar Negyal, who runs the global emerging markets income trust at JP Morgan, notes this is changing.
He says: “Income opportunities in emerging markets continue to grow. As corporate governance across emerging markets also improves, so do the prospects for healthy and reliable dividends.
"For example, Mexico is home to several promising sectors and managements who have committed to paying dividends. From an economic standpoint, part of the attraction is due to its position as a major commodity beneficiary but also its positive economic recovery.”
David Thorpe is investment editor at FTAdviser
