A recent survey by Bloomberg of 234 portfolio managers indicated that 20% believed that emerging markets have sufficiently decoupled from the US to independently make positive returns. A further 48% believed they could still be negatively impacted by US malaise, but nevertheless still outperform.
We’re glad to see some of the tectonic shifts we’ve been highlighting in the asset class are also being recognised by the market. The adage ‘when the US sneezes, the world catches a cold’ isn’t as pertinent as it used to be.
However, this ‘decoupling’ will be more apparent in certain geographic regions than others and we suspect that much of this diversifying potential will be missed by many because of benchmarks focused on the larger markets.
We’ve seen this positive potential in the analysis of our returns so far this year. Whilst the countries with our largest allocations have indeed made the highest contribution to returns, Taiwan being in lead position, it’s our smaller countries that’ve contributed disproportionately. Mexico, Greece and the UAE have all been very strong performers and as we allocate based on the bottom-up return and yield potential, our exposure to these markets has been higher than the index weightings.
One of the under-appreciated attributes of our universe is that it’s breadth which ensures that irrespective of where we are in the economic cycle, there’s almost always somewhere that’s doing well.
This applies to all these are countries, real GDP forecasts for Greece, UAE and Mexico this year are 2.6%, 3.9%, 1.8% respectively, which whilst modest in historical terms are much above regional peers. Each one has ‘idiosyncratic’ drivers for their growth. Greece is benefiting from EU stabilisation grants, a much-improved fiscal position (largely a function of the rapid dissemination of POS terminals during Covid) and a normalisation of tourism. Mexico has already seen over $10bil of FDI announced so far this year as a function of ‘near-shoring’, leading to strong employment, credit and demand for industrial real-estate. Dubai continues to see the benefits of a open economy, with visas (and other) reforms catalysing inward immigration of high earning professionals.
Whilst these country-specific factors create a rising tide for companies in our portfolio, we can also see genuinely idiosyncratic ‘self-help’ measures that are independent to the broader economic impulse.
In South Korea a key long-term development has been the push towards better governance and capital allocation, catalysed by the National Pension Service which owns around 10% of the market and in pursuit of closing significant valuation discounts.
One of the clearest trends has been towards higher dividend pay-outs and share buybacks. Earlier this year the market heavy-weight Hyundai Motors announced a maiden formal dividend policy with a minimum 25% pay-out, together with the sequential cancellation of treasury shares.
Using consensus expectations, this translated to a 5% annual dividend yield. However, as we own the preference shares which trade at a 50% discount, this doubles to a 10% dividend. With local risk-free interest rates at 3.5% we’ve already seen a significant revaluation. We expect there’ll be growing interest over time and the discount to narrow further.
Other Korean companies in the banking and telecom sectors that we also have exposure to have also made similar commitments in recent years, so we expect this market discount to continue to close whilst we benefit from the dividend flows.
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