Skip to the content

Dividend risks painting grim picture for emerging market funds

16 February 2015

A new report says emerging markets could see an extensive dividend decline this year because of weakness in the price of oil.

By Daniel Lanyon,

Reporter, FE Trustnet

Emerging market stocks will come under pressure in 2015 as company dividends are likely to see large falls due to an ongoing low oil price, according to a report by Henderson Global Investors, which says despite the commodity’s more recent recovery there is still pain to come.

Oil fell almost 55 per cent between June 2014 and January 2015 but has recovered some of its value in recent weeks. However, it languishes around $60 per barrel, having hit a $45 low in January.

Performance of index over 1yr


Source: FE Analytics

The Henderson Global Dividend Risk Index estimates that while all oil producing companies will come under pressure from the obvious decline in revenue, developed market blue-chip names will handle the headwind better than the high growth, and leveraged, firms of emerging markets.

“With the oil price in steep decline in the fourth quarter, the prospects for dividends from oil companies are worth special attention. Though they rose 5.8 per cent in 2014 to $134.1bn, making this the second largest dividend-paying industry, there will be question marks over the sustainability of their dividends going forward, as lower prices feed into lower profits.”

“Companies in emerging markets are more likely to cut given fewer opportunities to cut capital expenditure and weaker balance sheets.”

“The falling oil price is a key factor influencing our decision to reduce our expectations for overall dividend growth from emerging markets, where dividends from oil companies account for 26 per cent of the total, around twice their share in global markets overall.”

In contrast, the report states that income-paying stalwarts such as BP and Shell will maintain their status despite the oil prices.


It said: “The big oil producers in developed markets, which account for around three quarters of the sector’s dividend payments, are unlikely to reduce their dividend pay outs in 2015. In the shorter term they are likely to prefer to allow dividend cover to fall by paying out a larger percentage of their profits rather cutting the dividend they pay.”

“Royal Dutch Shell is commonly the largest dividend payer in the world. Royal Dutch Shell has not cut its dividend since World War II, despite wide swings in the price of oil since then. French multinational oil and gas company Total has not cut its dividend for 40 years.”

Until mid-2014, emerging markets were touted as experiencing a rapid rise in consumption that would boost economies and aid a transition from the previous high growth decade that relied on commodity and export-led growth.

It also seemed that emerging markets had shaken off the negative sentiment around the end of quantitative easing (QE) in the US that prompted a widespread sell-off in the asset class in 2013, when this was first hinted.

However, over the past three years the MSCI Emerging Markets index is up just 3.74 per cent and has seen several significant sell-offs, spelling disappointing returns for the average fund in the IA Global Emerging Markets sector. However 2014 was a return to positive territory for the index after a torrid 2013.

Performance of index and sector over 3yrs

 
Source: FE Analytics

According to Henderson’s report, underlying dividends in emerging markets grew 8.5 per cent in 2014 for the full year but in total headline dividends, which include special dividends, fell 11.7 per cent – also partly due to currency weakness.

Among the five BRICS countries - Brazil, Russia, India, China and South Africa, which account for two-thirds of emerging market pay outs – only China posted growth at a headline level, up 6 per cent, with each of the others seeing headline declines.

“The Chinese banking sector produced strong increases, thanks partly to fixed pay-out ratios on growing profits at state owned banks. The Russian currency halved over the course of 2014, but most of that decline took place in the fourth quarter, when almost no Russian dividends were paid. The full force of the currency crisis in that country will therefore only be felt in 2015.”


“As the recession bites and sanctions take their toll, not only will the translated value of Russian dividends be much smaller, but it is quite likely that there will also be cuts from a range of Russian companies in rouble terms. Oil giant Lukoil, which delayed the payment of its latest dividend until January 2015, is holding the rouble value of its dividend steady.”

 “In dollar terms, however, a payment worth $1.3bn in 2013 is now worth just $702m. Russian dividends tend to be rather sporadic, and are highly variable, and with the problems the country is currently facing are likely to remain so. Russia accounted for almost $1 in every $6 paid in emerging markets and is a big factor in the downward revision of our expectations for this group of countries.”

 Of the 80 funds in the IA Global Emerging Markets sector, 44 have Russia exposure with the biggest overweight being in the Templeton Global Emerging Markets fund, run by veteran manager Mark Mobius with 10.3 per cent of the fund exposed, while the GS Growth Markets Plus Equity Portfolio has 7.6 per cent.

Few other funds have nearly as much but several have around 5 per cent such as JP Morgan Emerging Markets Income, Aviva Emerging Equity Manager of Manager 1, FP HEXAM Global Emerging Markets and GS GIVI Growth & Emerging Markets Equity Portfolio.

Editor's Picks

Loading...

Videos from BNY Mellon Investment Management

Loading...

Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.