Higher interest rates have eroded the dividend yield advantage equities have held over risk-free assets for much of the past two decades. As a result, high-yielding equities have become more sought after, as evidenced by their outperformance in this year’s bear market.
In this report, we highlight listed emerging market shares with inflation-beating dividend yields; while some are cyclically exposed, others should be more resilient to any macro downturn.
The US equity market no longer gives a dividend yield pick-up versus risk-free assets
For much almost two decades, dividend yields have exceeded treasury bond yields. The Federal Reserve’s sharp but belated response to building inflationary pressures has reversed that position in a matter of months. Indeed, the yield pick-up that US treasuries give against the US equity market is at the highest level since 2007. The previous peak in the gap was in 2000. In both cases, equity markets significantly underperformed thereafter.
The attractions of higher-yielding equities are now more in focus
With risk-free assets now comfortably exceeding equity dividend yields at the market level, those shares that still do offer a yield pick-up are becoming more sought after. The high demand for UAE toll road operator Salik’s IPO (49x oversubscribed) gives a recent illustration.
We have identified 189 emerging market equities with market caps above US$2.5bn that offer dividend yields in excess of 6%. These names have declined by 6% year-to-date, substantially outperforming the 25% decline in the broader emerging markets equities asset class.
A large proportion (44%) of these high-yielders are located in China, with Latin America and Eastern Europe also over-represented.
By sector, financials and commodity plays (energy, materials) feature heavily among this group of high-yielding equities. With clouds gathering on the macroeconomic horizon, it may be that these firms are already discounting tougher times ahead. However, as we highlight below, investors can also access high-yielders in less economically sensitive sectors, such as consumer staples and communications.
Real dividend yields may be a more useful yardstick
With inflation rates picking up globally, real dividend yields may represent better indicators of value for investors, particularly when comparing across the extremely varied universe that constitutes emerging markets.
Applying this filter reduces the universe of stocks to a more manageable 126. By country, China dominates, with two-thirds of the sample. By sector, materials overtakes financials to become the biggest constituent (24% of the sample).
Large-cap high-yielders by geography
We highlight below some names with yields that exceed both policy interest rates and inflation. Clearly, investors have substantial doubts about the Chinese economy, as evidenced by the massive underperformance of its equity market over the past 1.5 years, and the depressed PE multiples at which many stocks trade. And Russian valuations may be distorted by sanctions. However, even strongly performing markets, such as India, contain a sprinkling of higher-yielding names.
Large-cap high-yielders by sector
We highlight below some of the investable names with yields that exceed both policy rates and inflation. Many of these names are in economically sensitive sectors, where earnings and dividends may be vulnerable to any downturn. Some are subject to sanctions. But others may provide a source of portfolio stability as the macroeconomic storm clouds gather.