National Conference on Public Employee Retirement Systems

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Unlocking Opportunity in Emerging Market Equity Income

By: Matt Williams, abrdn

abrdn looks at three key developments that may help provide access to the emerging market equity dividend opportunity over the long term.

This is an excerpt from NCPERS Spring 2024 issue of PERSist, originally published April 25, 2024.

Not every dividend payer is created equal.
The challenge for income investors is finding a company that not only offers an attractive payout for its shareholders but can do so over the long term. Emerging market (EM) equities are increasingly exhibiting these characteristics. We explore three key developments that may help identify future opportunities:
  • Technology as a platform
  • Green transition
  • Domestic brands

Which dividend payers provide a long-term answer?
Evidence is mounting that EMs are a fertile hunting ground for income, not just capital growth. The proportion of EM companies paying a dividend has grown significantly over the last two decades, with around 90% now doing so (and more than one-third of these yielding over 3%) (Chart 1).1,2
The proportion of dividend payers in EM is comparable to that in developed markets (DM). However, the key is unearthing the companies whose dividends are sustainable over the long term: Can the business thrive and survive in both good times and bad? Does it generate healthy levels of cash flow to maintain its dividend payments (or to start payouts in the future)?

Making these judgements requires detailed fundamental analysis, but also consideration of external influences. No matter how well a business may be run, it needs to be in the right place at the right time to prosper. To do this, we've identified two essential microeconomic developments. Cross-sector and cross-region, these allow us to pinpoint the companies that are most capable of generating long-term shareholder income.

Technology as a platform
Technology has helped transform EM from economies dominated by commodities to something more diversified. Many EM companies have embraced leapfrog innovation, adopting more advanced technologies, such as digital payments, to bypass the more conventional routes to growth. This has allowed them to catch up – or even surpass – DM competitors.

We've entered a new digital era, powered by artificial intelligence (AI), affecting everything from how we travel to the way we spend our money. What makes growth in this new era such a powerful investment trend is that many key technologies are coming together at the same time.

Smarter technology in transport also comes with huge demand for additional sensors and components. Electric vehicles need more sophisticated chips and in greater numbers than the more conventional internal combustion engine cars.3 Autonomous vehicles require even more (Charts 2 and 3). Essential functions such as judging road positioning and making split-second safety decisions need large technology sets, including GPS, radar, and lidar.4

A new generation of consumers
Spending power is rising dramatically in EM. Nations including India and Indonesia have seen large increases in their working-age populations. Together with fewer people having to support dependents, this is a recipe for potentially much greater economic growth. While the precise definition of middle class can vary, median income has increased substantially across many EM countries in recent years (Chart 4).5

Final thoughts
Taken together, these microeconomic pillars, which frequently overlap, help set the backdrop for well-run companies with established and loyal customer bases to sustain and grow their businesses. Alongside our follow-the- cash-flow analysis – focusing on companies with strong balance sheets and attractive fundamentals – we can stay alert to opportunities in cash-generative businesses that we believe can pay out sustainable and growing dividends to shareholders.

We believe the combination of high levels of income, and sufficient capital reinvestment, should result in attractive dividend yields for shareholders and a growing yield as the business continues to expand over time.

About the Author
Matthew Williams is a Senior Investment Director on the Global Emerging Markets (GEM) desk at abrdn, where he is responsible for the GEM Income strategy. In terms of research responsibilities, Matt is currently sector lead for Industrials and Communication Services and also covers Industrials. Matthew joined the company in 1998. He has successfully managed country funds in both Japan and Asia Pacific. He moved from the GEM and Asia Pacific team based in Edinburgh to the London based GEM team in April 2018 following the restructuring of the equity division. Matthew holds a BA in Economics from Durham University in 1998 and a Diploma in Investment Analysis Associate of the Society of Investment Professionals (formerly AIIMR). He is also a CFA charterholder.

Disclosures: Foreign securities are more volatile, harder to price and less liquid than U.S. securities. They are subject to different accounting and regulatory standards, and political and economic risks. These risks are enhanced in emerging markets countries.
Dividends are not guaranteed and a company's future ability to pay dividends may be limited.
Projections are offered as opinion and are not reflective of potential performance. Projections are not guaranteed, and actual events or results may differ materially.
The above is for informational purposes only and should not be considered as an offer, or solicitation, to deal in any of the investments mentioned herein. abrdn does not warrant the a curacy, adequacy or completeness of the information and materials contained in this document and expressly disclaims liability for errors or omissions in such information and materials. Accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of the reader, any person or group of persons acting on any information, opinion or estimate contained in this document.
In the United States, abrdn is the marketing name for the following affiliated, registered investment advisers: abrdn Inc., abrdn Investments Limited, abrdn Asia Limited, abrdn Private Equity (Europe) Limited, and abrdn ETFs Advisors LLC.

Factset, Jefferies Equities Research, January 2024.
2 Bloomberg, October 2023.
3 "Fighting an unprepared battle – Rethinking auto semiconductor strategy in an uncertain era." Semiconductor Industry Series. Deloitte, November 2021.
4 Lidar is a method for determining ranges by targeting an object or a surface with a laser and measuring the time for the reflected light to return to the receiver.
5 Haver, March 2021.


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