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GEM income manager backs South Africa

GEM income manager backs South Africa

Going off the beaten track throws up attractive dividend companies says Omar Negyal.

‘We can find many different companies with progressive dividend policies committed to growing their dividends over the medium term,’ he said.

Negyal, portfolio manager for GEMs at J.P. Morgan Asset Management has co-managed JPM Emerging Markets Dividend A Acc EUR since December 2012, alongside Richard Titherington.

Another market where Negyal has found attractive dividend opportunities is in South Africa.

‘There are interesting dividend ideas in South Africa where companies have a good balance between returning cash to shareholders and reinvesting cash, so we have income today, and growth in the future. Many South African management teams are able to do this,’ he added.

Keeping a portfolio of between 50 to 80 names, Negyal noted the strategy focuses on bottom up stock picking with a focus on strong ROE, good balance sheets and free cash flow.

‘All our companies (in the strategy) must pay dividends, and we want a balance between yield and growth,’ noted Negyal, who added the portfolio currently has an underlying gross yield of around 5%, and a focus on off-benchmark names, with an active share of around 82%.

Cyclical weakness in EM

Of late, EM equities have come under pressure but Negyal believes the recent pressure is due to cyclical, rather than structural factors.

According to Negyal, ‘The growth in dividends and earnings has been higher in EMs than in the developed markets, but the sustainability of dividends in EM stocks has improved as EM companies have improved their capital allocation, and have become more willing to pay dividends.’

While profitability of EM companies has fallen, he argues the reasons for the decline could recede, saying, ‘margins of EM companies have declined for two key cyclical reasons: wage inflation and a lack of pricing power. EM companies have struggled to pass higher wage costs to their customers.’

‘However, these are symptoms of a weak global economy, and with improvements in the global economy and a rising rate environment in the US, we should see better demand overall, and better pricing power, and that could lead to improvements in the margins of EM companies.’

Since the start of 2013 to end-October 2013, JPM Emerging Markets Dividend A Acc EUR has returned 3.05% against the benchmark MSCI EM NR EUR return of 0.30%.

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