LONDON Jan 11 Global investors seem happy to
slip back into riskier waters of emerging market equities once
again but it's a step-by-step process and ways of staying in the
shallows are still being sought by many.
As reflationary policies of the world's central banks have
sunk real yields on traditional safe-haven bonds into negative
territory, income-seeking investors have over the past year or
more pushed out to higher-yielding debt and "quality" western
blue chip stocks with hefty dividends.
And if, as some strategists now believe, the next big step
is a 'great rotation' out of now expensive government and
corporate bonds and into undervalued equity, then the big
underperforming emerging markets, such as China, are back in
Describing this week as a "decisive breakout" for equity
funds at large, tracker EPFR said inflows to all equity mutual
funds in the four days to Tuesday, at $6.8 billion, outstripped
bond inflows. Cumulative inflows of more than $40 billion since
the start of last month are now more than twice that to bonds.
Morgan Stanley's cut of the same data shows the full week to
Jan 9 showed a record week of inflows to emerging market
equities of some $7.4 billion, even as emerging bond flows
Markets have been responding. MSCI's emerging market equity
index has jumped 6.5 percent since the start of
December, outstripping the 5 percent gain on the global index
And Shanghai's gains of almost 15 percent in that
period show how much China's economic growth rebound has been a
key driver and illustrates the fact that it emerged late last
year as most global investors top country pick for 2013.
Yet with few believing the coast is fully clear given such a
fragile global economy and financial system, persistent euro
troubles and U.S. budget wrangling, there's still demand for at
least some safeguards and defensive strategies even in what are
perceived to the riskier spaces.
One of the growing trends of 2012 was to start seeking
emerging market stocks with big dividends, trying to find a
middle ground between what have traditionally been considered
white-knuckle rides of pure growth plays with the desire for
steady income and lower volatility.
According to Lipper data there were at least 50 new funds
launched worldwide last year specifically targetting emerging
market income stocks -- or more than four times that amount if
you include global equity or Asia Pacific equity income vehicles
that include at least some proportion of emerging market names.
"What works for investors with this sort of product is that
it's not totally beholden to the sorts volatility traditionally
associated with emerging markets," said Emily Whiting, portfolio
manager at JPMorgan Asset Management whose emerging income fund
launched in 2010 now has 250 million sterling in assets.
"The beauty is you reduce the risks while benefitting from a
compounding of the growth and income," she said, adding that 250
emerging market stocks worldwide pay dividends of more than 4
percent average available in Britain or European blue chip
indices and the 2.5 percent available on Wall Street's S&P500.
Dividend yields on emerging market indices at large are now
at least equivalent of global benchmarks and dividend payout
ratios as a percentage of earnings exceed U.S. equities.
Julian Mayo, investment director at Charlemagne Capital who
runs an emerging market income fund of more than 40 stocks, said
the rolling 52-week volatility of this fund last year was 9.9
percent, less than the MSCI emerging benchmark's 14.5 percent or
19 percent in Germany and 12.2 percent in the United States.
"Essentially what we're aiming for is low volatility
exposure to emerging markets," he said.
The fund - with stocks from across the emerging universe
from Asia, Latin America, east Europe and the Middle East and
with exposure to a range of sectors topped by financials,
telecom and consumer stocks - returned more than 20 percent
For many fund managers looking at this area, the emerging
market dividend story squares a number of circles for both
investors and many developing countries alike.
For all their superior growth and balance sheet attractions
compared with hobbled western economies and markets, emerging
equities have continued to suffer volatile and dramatic
reversals leaving the bigger BRIC (Brazil, Russia, India and
China) markets underperforming persistently in recent years.
Western investor concerns about governance and transparency
and fears of domestic capital flight have played their part.
But in many countries, especially China, the problem is at
least partly a result of a lack of well-established domestic
savings industry that seeks long-term income and returns from
equities as opposed to the often short-term speculative activity
of local retail and household players.
Mayo at Charlemagne said this is now changing and
developments in China already this year could prove important in
this regard and could be a "game changer".
This week the Shanghai Stock Exchange said listed firms will
have to pay dividends of more than 30 percent of annual profit
or face stricter disclosure obligations, extending the
authorities' push to lure investors back to the country's
A sliding scale for tax on dividends came into effect from
the start of the year.
So for all the focus this week and next on the ebbs and
flows of high-frequency macro economic numbers from China, there
is some hope of more stable footing for its markets over time.