As global central banks enact ever-looser monetary policies, yield-starved investors around the world are now turning to the attractive payouts from the developing markets. U.S. investors can also gain exposure to emerging market dividend stocks through exchange traded funds.
“Investors are switching into EM stocks for yield ‘income’ given a lack of bond income in developed markets,” UBS AG analysts led by Geoff Dennis said in a note, according to Bloomberg.
Traditionally, emerging market equities have been seen as a bet on global growth and are usually bought for capital gain instead of income generation. Additionally, volatility in emerging equities, especially after accounting for foreign exchange risks, can overwhelm positive carry, which may weigh on stock valuations based on interest rates.
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However, the UBS analysts argued that fixed-income portfolio managers who also have a mandate to acquire equities, or so-called cross-over investors, are now eyeing the emerging markets.
“EM equities are usually bought for growth (although not in the last five years) or for beta to seek outperformance in rising global markets,” UBS analysts said. “EM is usually only viewed as a ‘yield play’ if investors want to adopt a defensive posture in the face of weak global markets. However, at present, we are hearing more and more about investors looking for ‘yield’ in EM as a way to play rising markets, in a world where growth remains, at best patchy. This hunt for yield in EM appears to be a particular focus for global investors who have been underweight in EM for several years and are now looking for ‘cross-over’ opportunities.”
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