The world has changed and investors are now worried about the relevance of EM dividend funds in an environment of rising rates. This is a complex issue as the outcome depends on what the market is trying to discount by selling down government bonds.
The normalisation of interest rates as the global economy returns to trend growth has very different consequences to a situation where rates are ramped to fend off an inflation problem.
But inflation is unlikely to be an issue, and the most probable outcome – deflation – would lead to victory for dividend styles, albeit a pyrrhic one.
In the most likely rising rates scenario of a gradual global recovery, so-called ‘bond-proxy’ equities – held by investors for no other reason than the carry trade provided by their high dividend yields – may indeed suffer.
Some countries, especially those with wide current account or dual deficits, may see currency weakness erode returns for investors based in ‘hard-currency’.
However, prospects remain good for high-quality companies able to steadily grow earnings and cash flows and with the capital discipline to return a proportion of these profits back to shareholders, along with ‘value’ companies that for various reasons have been overlooked by the market.
We would expect a portfolio comprising of a combination of these to continue to outperform the market over the medium term.
Robert Davis is senior investment manager of the Emerging Markets High Dividend Equity Fund at ING Investment Management
