J.P Morgan Asset Management
The rising tide of dividend streams
By Omar Negyal, Portfolio Manager at J.P. Morgan Asset Management
As income investors in Emerging Markets, we place particular emphasis on governance and draw a direct link between a company’s dividend policy and the quality of its governance. In our view, a company’s willingness to return cash to shareholders is a tangible and positive governance indicator. We have engaged with many companies on this issue over time, to understand their motivations and capital allocation objectives.
Historically, Korean companies have been reluctant to pay out a dividend, preferring to keep the profit and reinvest, which has resulted in a large, structural underweight to this market versus MSCI Emerging Markets Index. However, the Korean government have been implementing a series of activities intended to encourage companies to pay out more dividends over recent years, looking to encourage broader equity ownership, improve corporate governance and enhance shareholders’ rights. As bottom up stock investors, we have seen this progress through a steady growth of dividend opportunities across the market, improved dividend sustainability and increased adoption of interim dividend.
One particular point of focus has been Korean Banks, an area that as income plus growth investors, with a sizeable opportunity set across EM, we have avoided for years, however recently we have started to find strong opportunities and added select exposure. Our lack of appetite historically had been due to lacklustre return on equity, which is never a great starting point, however going forward, we can at least consider that the rate environment is more helpful (if rate hikes are not necessarily a tailwind we can at least say they do not face a rate cut headwind).
Another positive shift is that Korean banks have not grown lending at a particularly fast rate in recent years which probably bodes well from an asset quality perspective. Crucially, shareholder return policies have improved over time and banks now have consistent/slowly rising dividend payout ratios (currently in the mid-20’s and heading to 30); they have also executed share buybacks and cancellation, which would not have happened previously.
Another interesting development across the investment universe has been the corporate life cycle in China. It is clear that more Chinese companies are acknowledging that they are at the point where growth is slower and so shareholder return / capital allocation is becoming more important. Chinese internet is the obvious example. Another example would be some companies like Alibaba have announced group restructuring and others like JD.com have announced they are going to start paying annual dividends.
So as investors who are interested in companies that are a bit further along in their life cycle and where there is a balance between growth and dividends, that means companies in China could become more interesting to us, not less.
If we go back three years, we had our maximum underweight in China (vs MSCI EM) and we slowly added to that market on weakness till we were neutral mid last year. We are essentially around there still, looking for stock selection to drive returns from here. And we are taking a very close look at these nascent dividend opportunities in areas like e-commerce which could be interesting for us.
Investing for income in Emerging Markets reflects a more conservative approach, however as the examples above highlight, there continues to be an evolution of the opportunities available for stock level investors, allowing us to construct a portfolio made up of companies which can generate high returns on equity (for a long period of time), produce healthy cash flow and, of course, have positive dividend policies which reward minority shareholders with regular payouts; using these kinds of stocks, we seek to build a portfolio with a higher yield than the market.
Important Information
For Professional Clients/ Qualified Investors only – not for Retail use or distribution.
This is a marketing communication. The companies above are shown for illustrative purposes only. Their inclusion should not be interpreted as a recommendation to buy or sell.
The views contained herein are not to be taken as advice or a recommendation to buy or sell any investment or interest thereto. Reliance upon information in this material is at the sole discretion of the reader. Any research in this document has been obtained and may have been acted upon by J.P. Morgan Asset Management for its own purpose. The results of such research are being made available as additional information and do not necessarily reflect the views of J.P. Morgan Asset Management. Any forecasts, figures, opinions, statements of financial market trends or investment techniques and strategies expressed are, unless otherwise stated, J.P. Morgan Asset Management’s own at the date of this document. They are considered to be reliable at the time of writing, may not necessarily be all inclusive and are not guaranteed as to accuracy. They may be subject to change without reference or notification to you. The value of investments and the income from them may fluctuate in accordance with market conditions and investors may not get back the full amount invested. Past performance and yield are not a reliable indicator of current and future results. There is no guarantee that any forecast made will come to pass. J.P. Morgan Asset Management is the brand name for the asset management business of JPMorgan Chase & Co. and its affiliates worldwide. To the extent permitted by applicable law, we may record telephone calls and monitor electronic communications to comply with our legal and regulatory obligations and internal policies. Personal data will be collected, stored and processed by J.P. Morgan Asset Management in accordance with our EMEA Privacy Policy www.jpmorgan.com/emea-privacy-policy. This communication is issued in Europe (excluding UK) by JPMorgan Asset Management (Europe) S.à r.l., 6 route de Trèves, L-2633 Senningerberg, Grand Duchy of Luxembourg, R.C.S. Luxembourg B27900, corporate capital EUR 10.000.000. This communication is issued in the UK by JPMorgan Asset Management (UK) Limited, which is authorised and regulated by the Financial Conduct Authority. Registered in England No. 01161446. Registered address: 25 Bank Street, Canary Wharf, London E14 5JP
Material ID: 09o6233107125123
