In January the fund appreciated by 3.6% as markets, particularly in Asia, were buoyed by the prospect of the Chinese re-opening.
China is the only country globally with supportive policy action combined with a benign rates environment and so we have added very selectively to positions where we see extreme valuation discounts (one position had negative enterprise value), whilst remaining within our twenty percent country limit. We still see significant structural economic and political headwinds as the economy looks to pivot away from infrastructure spending, so we are focused on areas we consider to be less speculative such as mobility and the consumer. However, the cessation of zero-Covid will be reflected in the re-valuation of many of our other regional holdings.
More broadly, as we start the new calendar year we also roll forward our analysis of investible high dividend paying stocks in the emerging world. As of year-end the number meeting our criteria* has again increased and now stands at 512 companies. This is up from 480 last year and 136 a decade ago, a 15% annualised growth rate. This compares to developed markets which are roughly a fifth the size and more importantly have grown at less than 5% over the same period.
We’ve been asked on several occasions what’s driving this trend. The simplistic answer is a sequential improvement in capital allocation and corporate governance. But to understand what’s made this into a secular trend, you need to look further below the surface. Broadly there’s been three factors we can identify:
The most obvious is that management have learnt from experience. Life at the helm of an EM business over the past few decades has been quite Darwinian. Whilst there’s been many opportunities to thrive there’s been no shortage of exogenous shocks and amplified economic cycles. Navigating this successfully, particularly in the private sector, requires skill in allocating capital to ensure both an attractive return and business continuity. Anecdotally, it’s the countries with the more unstable macro environments (such as Turkey or Brazil) that we tend to observe have the most competent management teams.
As we can show empirically this has led to a sequential improvement in free cashflow generation and deleveraging of balance sheets across our geographies, both essential foundations for sustainable dividends.
Then there’s the influence of the ‘foreign’ financial community, which to a greater or lesser degree started the convergence process in standards for accounting, governance and investor relations. This was more relevant in earlier years than it is today. It’s now the emergence of significant domestic institutions who are taking the baton and are undoubtably the most relevant part of the story looking forward.
Whilst it’s difficult to show clear causation given the significant regional differences, there can be no doubt about the growth of domestically managed assets with long-term investment objectives. Out of the fifteen largest sovereign wealth funds only two (Norway and Singapore) originate from the developed world. There’s a similar proliferation in local pension and mutual funds, again a significant dispersion but the trend is clear. Chile pioneered the first privatised pension system in 1981 with individual accounts owned by workers but managed by private pension providers and has formed the basis for similar reforms in more than 30 emerging countries.
Some are now quite advanced such as South Africa which has 80% of GDP in pension assets. But the trends elsewhere are clear, over the past ten years the average growth of funded and private pension assets in Brazil, Mexico, Korea and India is 92% with most of these now at around 30% of GDP. The legislative reform process continues with most recently significant measures announced that will grow assets in Mexico and China. There is a recognised urgency to this reform as according to a study by Swiss Re, by 2050 the emerging world will be home to almost 80% of the world’s population aged 65 and above.
Having this ‘local oversight’ is very useful to us as a foreign investor. When talking with companies in our portfolio such as Kety, PZU or Maybank, all of whom have significant local investors, we can clearly see the influence of the longer-term outlook of these institutions.
This secular trend in our local markets means we can piggy-back on their efforts to expand their own more limited high yielding universe, whilst we enjoy the benefits of global diversification. The economic cycle will inevitably produce bumps in the road but the trend is clear, this corner of capital markets will continue to expand.
* Companies with market cap ($) greater than $250m, average daily volume > $1m, at least two analyst estimates and has a blended forward estimated dividend yield of > 6%
