How to seize opportunities in Emerging Equities?
14 MAY, 2024
Author: Matt Williams, Senior Investment Director at abrdn
Not all dividend-paying companies are the same. The challenge for investors is to find a company that not only offers an attractive payout to its shareholders, but can do so over the long term.
There is growing evidence that emerging markets are fertile ground for income and capital growth. The proportion of emerging market companies paying dividends has grown strongly over the last two decades and is now around 90% (with more than a third offering a yield of more than 3%).
These three microeconomic keys will help to identify the companies with the greatest capacity to generate long-term income for shareholders.
Technology as a platform
Technology has helped transform emerging markets from a commodity-dominated group of economies to something much more diversified. Many emerging market companies have adopted the concept known as ‘leapfrog innovation’, integrating more advanced technologies, such as digital payments, to bypass more conventional ways of increasing business growth. This has enabled them to catch up with - or even surpass - their competitors in developed markets.
We have entered a new digital age, driven by artificial intelligence (AI), which affects everything from how we travel to how we spend our money. What makes the growth of the digital age such a powerful investment trend is that many key technologies are coming together at the same time. This new digital economy requires technological hardware to meet its demands.
For example, generative AI models, such as ChatGPT, are expected to contribute $4.4 trillion to the global economy. However, this transformative innovation requires vast amounts of processing power.
Electric vehicles, meanwhile, need more sophisticated chips in greater numbers than more conventional internal combustion engine cars. Autonomous vehicles need even more. Essential functions such as determining road position and making split-second safety decisions require large technology packages such as GPS, radar and LIDAR.
Technology hardware forms the building blocks of the new digital economy, and much of it comes from emerging markets. The world's largest semiconductor foundry is Taiwan's TSMC, which supplies high-performance chips to major global brands such as Apple, NVIDIA and Intel. Emerging Asia is also home to global players such as Samsung Electronics, fabless semiconductor company Mediatek and telecommunications equipment tester Sporton International.
Green Transition
Although nations, businesses and activists disagree on the pace of change needed to reduce harmful CO2 emissions, the focus is on greener, low-carbon energy sources. Other factors, such as the war in Ukraine, have forced policymakers to rethink their energy dependence on a handful of exporters.
There is already a well-established scale and development of renewables in emerging markets. These markets are also the focus of attention as the energy transition accelerates. Developments include the expansion of electricity grids, the exploration of new technologies such as carbon capture and storage, or the adoption of new fuel sources such as hydrogen. A prominent example is electric battery technology, which is essential for many aspects of the energy transition.
Many of the essential materials needed for greener technology, such as copper and platinum, are mined in emerging countries, especially in Latin America. Demand for copper, used in solar photovoltaics, wind power and grid battery storage, among others, is expected to increase from around 25,000 kilotonnes in 2022 to almost 40,000 kilotonnes in 2050.
So far, investment levels are far below what is needed to reach ambitious net zero emissions targets. According to the most recent estimates, the cumulative investment gap to keep global temperature rise below 1.5°C in 2050 is $150 trillion. With this in mind, we expect to see a continued acceleration of projects in the coming years, giving emerging market companies a platform to thrive.
A new generation of consumers
Purchasing power in emerging markets is increasing exponentially. Countries such as India and Indonesia have experienced large increases in their working age populations. This, coupled with fewer dependents, is a recipe for potentially higher economic growth.
Average income has risen substantially in many emerging countries in recent years. According to one estimate, by 2024, 113 million people will become part of the global consuming class, 57% of whom will live in China and India.
This context of consumption growth is favourable for dividend-paying companies. It covers several sectors, such as food and beverages, sportswear, household appliances, motor vehicles, airports and financial products such as insurance and banking.
One of the most important aspects is that consumers are expressing a preference for national brands over global names. This benefits some leading emerging market companies that have already established significant market share in their respective sectors.
Conclusion
Taken together, these three often overlapping themes help set the backdrop for well-managed companies with established and loyal customers to maintain and grow their businesses.
The combination of high levels of income and sufficient capital reinvestment should translate into an attractive and growing dividend yield for shareholders as these companies continue to expand over time.
