Long-term investors seeking income for pension portfolios should consider the growth of dividend-paying companies in the emerging market indices, managers have said.
Moreover, the potential for several countries to grow their way out of the various emerging market indices over the next decade and into the developed market indices, presented an opportunity for long-term investors, they added.
Andrew Lister, manager of the £371.3m Aberdeen Emerging Markets Investment Company, and Ross Teverson, head of strategy, emerging markets, for Jupiter Asset Management, said investors should make sure they have exposure to EMs within their portfolios.
Lister said: "The outlook for income from emerging markets is promising, as there are a many companies in a wide spread of different countries and industries that generate cash in a range of currencies and then distribute dividends, offering genuine diversification.
"This is a real contrast to the UK market, where the experience of income-oriented investors has been extremely challenging of late and where the risks remain linked to a relatively narrow group of companies."
According to iShares, the MSCI Emerging Markets index is producing an approximate dividend yield of 1.41 per cent. This compares with 3.11 per cent for the FTSE 100 (as at March 31, 2021).
However, as UK companies have been curtailing dividends while many EM companies are starting to pay dividends, the opportunities for growth over the decade looks strong in emerging markets.
Lister acknowledged that emerging markets can be perceived as too risky for more mature investors who are typically those seeking dividend income, but added: "We feel this is a gross oversimplification".
He explained: "Having emerging markets in the mix for income oriented portfolios is essential in my opinion, and this extends to bond markets, as well as equities.
"It’s with this in mind that we have an allocation to Chinese and frontier market bonds [within the investment trust], as we feel the potential returns are similar to equities, but with significantly lower volatility and correlations to other asset classes than one might expect."
Candidates for reclassification
Both managers said certain countries were ripe for reclassification, such as Poland, China, South Korea and Taiwan over the next 10 years, thanks to the maturity of many companies listed on their stock markets.
Indeed, more than 10 years ago South Korea was upgraded by S&P and FTSE Russell, while Poland was upgraded to developed market status by FTSE Russell in 2018.
Teverson commented: "With GDP per capita in terms of domestic purchasing power parity now close to that of some Western European economies, Poland is a candidate for reclassification." He said he expected the MSCI would upgrade it by 2030.
According to the International Monetary Fund, Poland's Projected Real GDP growth for 2021 is 2.7 per cent. This compares with 4.5 per cent for the UK and 3.5 per cent for Germany.