Ratings

25 Apr 2024

  Artemis | Emerging markets

Artemis: Emerging markets – an attractive combination of growth and income

Raheel Altaf, Global emerging markets equity

Investors have tended to view emerging markets as a long-term growth asset. Yet improvements to balance sheets and changes to shareholder policies now mean that many EM companies are offering attractive dividend yields and enacting share buybacks. This creates opportunities for investors looking for income as well as growth.

FOR PROFESSIONAL INVESTORS AND/OR QUALIFIED INVESTORS AND/OR FINANCIAL INTERMEDIARIES ONLY. NOT FOR USE WITH OR BY PRIVATE INVESTORS. CAPITAL AT RISK. All financial investments involve taking risk and the value of your investment may go down as well as up. This means your investment is not guaranteed and you may not get back as much as you put in. Any income from the investment is also likely to vary and cannot be guaranteed.

Investors tend to view emerging markets equities as a growth asset. Historically, of course, emerging economies have usually grown faster than developed ones. But this superior growth hasn’t always translated into better share price performance.

There are many reasons for this, but – put simply – the economy isn’t the stockmarket. While the number of companies one can invest in has risen quite dramatically in the last decade as a result of new companies coming to the market, there are also a large number of well-established businesses.

Increasingly, these have appealing characteristics for investors. For example we would argue that emerging markets equities should also be considered for their income distribution. Policy developments in a number of economies suggest dividend payouts could become more attractive. We have already been finding many businesses with outstanding shareholder yields on offer.

The dividend yield on the MSCI GEM index was 2.9% at the end of 2023. This headline yield masked a wealth of opportunities. The Artemis SmartGARP Global Emerging Markets Equity Fund’s yield was 5.5% at the same date1.

As the chart below shows, not only are we invested in higher-yielding companies than the market, but these businesses also have attractive cash generation to support dividend payments and have relatively less debt on their balance sheets.

We have many quality high yielders: our fund versus the benchmark

Source: Artemis

What is behind these attractive dividend yields?

Given the diverse universe of emerging markets stocks, there is a broad range of reasons for high dividend payouts. Healthy balance sheets, improving cashflows and shareholder policy reform make the dividend story in emerging markets a compelling one.

1: Conservative management – Asian companies

Tough experience has taught Asian managements to be conservative. We see little evidence of reckless expansion or M&A activity. Instead, we find lots of companies with strong balance sheets using their healthy cashflows to pay out dividends or for share buy backs – a sensible strategy when share prices are depressed.

For example, we have a big position in Kia Corporation, the Korean car maker. Kia delivers a nearly 6% yield and has also been buying-back shares. Over five years, Kia aims to purchase up to KRW 0.5 trillion (over $373m USD) worth of shares each year and cancel at least 50% of the repurchased shares2.

The framework we use to identify Kia as an attractive opportunity is one that we can apply to any company in our investible universe of almost 3,000 stocks.

We believe that share prices ultimately follow fundamentals. We track ‘value-per-share’ (VPS), a combined measure of earnings, cashflow, operating profits, dividends and asset value per share. When this is improving, we should expect the share price to keep pace. At times it doesn’t, which may be because investor attention is on shorter-term risks.

In our opinion, an opportunity is created when the share price lags the fundamental improvements. Kia has made significant inroads in the electric vehicle space. This ‘good news’ is yet to be reflected in the share price. At the same time, Kia it has an attractive and sustainable dividend yield, which is helpful against volatile market conditions.

Kia Corp relative VPS and share price

Source: FactSet, Artemis as at 18 January 2024.

2: Legislation – China’s state-owned enterprises

Investors tend to focus on China’s headline growth figures, which have been disappointing. This means they miss how the country is trying to reform its capital markets in part to encourage sensible investing at home and attract global capital.

One little-noticed theme is how the government is reforming state-owned enterprises, setting new performance targets that are often focused on return on equity, including requirements to return set proportions of cashflow in dividends. This has resulted in some favourable outcomes for shareholders.

One example that we hold is Sinotrans, one of the largest logistics companies in China. Sinotrans played a key role in China’s ‘Belt and Road’ initiative by providing international rail freight connections across routes as widespread as China-Germany and China-Laos. It now offers marine, rail and air freight forwarding, international express, shipping agency, and other services. Sinotrans trades on a P/E of 4.4x and a dividend yield of 8.3% and is growing its value per share at 22.2%3.

3: Buybacks

Korea has seen some interesting developments. Signs of progressive shareholder return policies have created some enthusiasm towards the beaten-down areas of the market. Korea’s finance minister vowed to narrow the ‘Korean discount’, encouraging companies to boost stock valuations.

On the corporate side, buybacks and dividends are surprisingly positive. In some instances, buybacks are occurring in companies where no dividend payments have ever been made. In part this reflects the fact that managements have confidence in their businesses and view the depressed share price as an attractive way to allocate capital.

In China, online retailer Vipshop has continued to grow its profits and improve margins despite the macro weakness in the economy. Buybacks have been generous, with the company announcing $500m repurchase facility in 2021 and increasing it by $500m in 20234.

4: Commodities demand – Brazil

Other emerging markets are booming. With its abundance of energy and commodities, Brazil is a prime example. As an agricultural heavyweight, supplying soya beans, corn, beef, coffee and sugar to many parts of the world, its economy is thriving.

This is evident in its record trade balance. Exports have been supported by a bumper harvest, while imports are down due to increasing self sufficiency in energy.

Brazil is also one of several emerging markets whose monetary policy has diverged from developed markets as inflationary pressures ease. Brazil’s central bank was early to take a hawkish stance on inflation in the wake of the Covid pandemic and started raising interest rates in March 2021, a full year ahead of the Federal Reserve. Having got ahead of the curve, it started to cut interest rates in August 2023 and has carried on doing so.

Commodities demand is surging: Brazil's trade balance ($bn)

Source: Bloomberg as at 18 January 2024. Brazil trade balance 12 month period.

As a result of this booming economy, substantial dividends are available in the Brazilian market, offered by companies with good growth prospects and attractive valuations.

The financial sector has benefited from commodity demand, particularly in agriculture. One beneficiary is state-owned Banco do Brasil, the leader in the fast-growing agribusiness sector. This is leading to higher loan growth and lower non-performing loans.

Banco do Brasil has a strong market position in a higher-yielding credit environment, with around 60% share of rural loans5. Yet the stock is trading on a p/e of 4.2x with a dividend yield of over 9%. This is not far behind the level of a 10-year Brazilian government bond yield, but on an equity that is very undervalued and which has been growing its value per share at over 20%6. We expect the share price to keep pace with the improving outlook.

Emerging markets – an attractive combination of growth and income

While the favourable income characteristics we’ve described above can’t be ignored, we would still advise investors to look to emerging markets for long-term growth.

In general, high dividend yields tend to be associated with mature companies with low growth rates. Yet we find a number of companies in emerging markets that continue to grow rapidly, but also generate an attractive income. This favourable growth and income combination is likely to create value for investors over the long run.

1Source Artemis, Bloomberg MSCI 31 December 2023
2Source: Kia announces 2023 fourth quarter business results | Automotive World
3Source: FactSet, Artemis as at 18 January 2024
4Source: Vipshop Announces US$500 Million Share Repurchase Program | Vipshop Holdings Ltd
5World Bank and Banco do Brasil Develop Innovative Climate Finance Solution
6Source for all figures : Factset, Artemis as at 18 January 2024

FOR PROFESSIONAL INVESTORS AND/OR QUALIFIED INVESTORS AND/OR FINANCIAL INTERMEDIARIES ONLY. NOT FOR USE WITH OR BY PRIVATE INVESTORS.

Capital at risk. All financial investments involve taking risk and the value of your investment may go down as well as up. This means your investment is not guaranteed and you may not get back as much as you put in. Any income from the investment is also likely to vary and cannot be guaranteed.

This is a marketing communication. Before making any final investment decisions, and to understand the investment risks involved, refer to the fund prospectus (or in the case of investment trusts, Investor Disclosure Document and Articles of Association), available in English, and KIID/KID, available in English and in your local language depending on local country registration, available in the literature library.

Risks specific to Artemis Funds (Lux) – SmartGARP Global Emerging Markets Equity

  • Market volatility risk: The value of the fund and any income from it can fall or rise because of movements in stockmarkets, currencies and interest rates, each of which can move irrationally and be affected unpredictably by diverse factors, including political and economic events.
  • Currency risk: The fund’s assets may be priced in currencies other than the fund base currency. Changes in currency exchange rates can therefore affect the fund's value.
  • Emerging markets risk: Compared to more established economies, investments in emerging markets may be subject to greater volatility due to differences in generally accepted accounting principles, less governed standards or from economic or political instability. Under certain market conditions assets may be difficult to sell.
  • China risk: The fund can invest in China A-shares (shares traded on Chinese stock exchanges in Renminbi). There is a risk that the fund may suffer difficulties or delays in enforcing its rights in these shares, including title and assurance of ownership.
  • ESG risk: The fund may select, sell or exclude investments based on ESG criteria; this may lead to the fund underperforming the broader market or other funds that do not apply ESG criteria. If sold based on ESG criteria rather than solely on financial considerations, the price obtained might be lower than that which could have been obtained had the sale not been required.
  • Charges from capital risk: Where charges are taken wholly or partly out of a fund's capital, distributable income may be increased at the expense of capital, which may constrain or erode capital growth.

Risks specific to the Artemis SmartGARP Global Emerging Markets Equity Fund

  • Market volatility risk: The value of the fund and any income from it can fall or rise because of movements in stockmarkets, currencies and interest rates, each of which can move irrationally and be affected unpredictably by diverse factors, including political and economic events.
  • Currency risk: The fund’s assets may be priced in currencies other than the fund base currency. Changes in currency exchange rates can therefore affect the fund's value.
  • Emerging markets risk: Compared to more established economies, investments in emerging markets may be subject to greater volatility due to differences in generally accepted accounting principles, less governed standards or from economic or political instability. Under certain market conditions assets may be difficult to sell.
  • China risk: The fund can invest in China A-shares (shares traded on Chinese stock exchanges in Renminbi). There is a risk that the fund may suffer difficulties or delays in enforcing its rights in these shares, including title and assurance of ownership.
  • Charges from capital risk: Where charges are taken wholly or partly out of a fund's capital, distributable income may be increased at the expense of capital, which may constrain or erode capital growth.

Investment in a fund concerns the acquisition of units/shares in the fund and not in the underlying assets of the fund.

Reference to specific shares or companies should not be taken as advice or a recommendation to invest in them.

For information on sustainability-related aspects of a fund, visit the relevant fund page on this website.

For information about Artemis’ fund structures and registration status, visit artemisfunds.com/fund-structures

Any research and analysis in this communication has been obtained by Artemis for its own use. Although this communication is based on sources of information that Artemis believes to be reliable, no guarantee is given as to its accuracy or completeness.

Any forward-looking statements are based on Artemis’ current expectations and projections and are subject to change without notice.

Third parties (including FTSE and Morningstar) whose data may be included in this document do not accept any liability for errors or omissions. For information, visit artemisfunds.com/third-party-data.

Important information
The intention of Artemis’ ‘investment insights’ articles is to present objective news, information, data and guidance on finance topics drawn from a diverse collection of sources. Content is not intended to provide tax, legal, insurance or investment advice and should not be construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any security or investment by Artemis or any third-party. Potential investors should consider the need for independent financial advice. Any research or analysis has been procured by Artemis for its own use and may be acted on in that connection. The contents of articles are based on sources of information believed to be reliable; however, save to the extent required by applicable law or regulations, no guarantee, warranty or representation is given as to its accuracy or completeness. Any forward-looking statements are based on Artemis’ current opinions, expectations and projections. Articles are provided to you only incidentally, and any opinions expressed are subject to change without notice. The source for all data is Artemis, unless stated otherwise. The value of an investment, and any income from it, can fall as well as rise as a result of market and currency fluctuations and you may not get back the amount originally invested.


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