Latest Emerging Market Viewpoints
From Matt Linsey and the North of South Capital team
The hunt for yield is back
Over the past nine months the world has changed dramatically. Towards the end of last summer, US 10 year bond yields were at 3.2% - levels almost recognizable to someone from a time before QE and ZIRP. German 10 year bond yields were low but clearly positive. Emerging markets were responding in ways that reflected their fundamental strengths and weaknesses – a collapse in Turkey and Argentina, steadily rising yields elsewhere. Normalization of interest rate policy was expected and asset prices were going to reflect this.
Fast forward to today and we seem to have stepped back in time.
US 10 year yields have dipped below 2%, German equivalents are solidly negative. Investors are willing to accept a yield barely above 1% for 100 years on an Austrian bond. Brazilian yields have declined from 12% to 7.6% - the lowest in modern history. Taiwanese bond yields are at 0.75%, only 0.15% above all-time lows. Normalization of interest rate policy has been postponed – to some it may seem, indefinitely.
As a result, the hunt for yield is back on a global scale. Junk bond spreads are tight, defensive yield stocks in developed markets have rallied. Few asset classes still offer reasonable real yields. This leads us back to quality dividend paying stocks in Emerging Markets. For various reasons many of our markets continue to offer attractive levels of income. In Brazil, dividends used to not be able to compete with extraordinarily high interest rates – savers kept their money on deposit or in fixed income.
Today they are faced with having to work harder for their yield. This is leading to increasing interest from domestic investors in their own equity market. We own housebuilder Tenda which offers a yield in excess of 8% as well as toll-road company CCR with a yield of over 5% that is paid from inflation-linked revenues.
Russia, the classic value market retains its cachet thanks to political and sanctions risks. However its government budget and macro indicators are nowadays among the most conservative in the world. Surpluses from oil revenues are saved for a rainy day. This has helped bring down the cost of capital even as Russian companies are becoming increasingly generous dividend payers.
In Taiwan, noise around tariffs and sanctions on Chinese technology have dampened enthusiasm for the market, even as we go into dividend season. Our portfolio in Taiwan yields over 6% as businesses have strong balance sheets and an ability to pay generously. While we do not have a crystal ball to predict the ultimate resolution of the trade war, we have high confidence that the businesses we own in Taiwan will find ways of maintaining their crucial positions in the global value chain.
In some ways, we are therefore spoilt for choice when it comes to sourcing dividend income. We have long been believers in the importance of receiving a positive income on our investments. As we time travel back to the land of zero interest rates, this conviction only grows stronger.
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