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Five insights in five minutes

Five in Five: Dividends, M&A, EM debt, China demographics, Nasdaq
03 September 2021

    Dividend rebound

    Excluding the impact of taxes, you technically shouldn’t care whether you receive a dividend or your favourite stock rises in equivalent value. But income is useful when buying clothes (or matching liabilities) and selling shares each time is a pain. That is why investors have loved the past two decades. As you can see in the left hand chart, global dividend returns have exceeded price returns.  Same in China, Asia and in Europe. More recently, however, many companies have cut, suspended, or simply cancelled their dividends because of the pandemic (chart on right). The good news is the first half of 2021 has seen a recovery in payouts. In addition, the European Central Bank has decided not to extend beyond September 2021 its recommendation limiting bank dividends. As a result, expect financials as well as tech and healthcare companies to be driving total dividend growth in the fourth quarter – perhaps even exceeding pre-Covid levels according to some forecasts. With rates keeping low, equity income and dividend-centric solutions might be worth considering for investors with a longer-term horizon.

    Ways to play: global equities, equity high income, Asia equities, emerging market equities

    Dividend rebound

     

    Global M&A

    Another week, another $50 billion of pending, completed or proposed deals globally. Never before had the world seen more than 10,000 transactions in three months, as it did in the second quarter, with values steadily above one trillion dollars since the pandemic. American targets account for about half of activity, followed by China and the UK with nine and six per cent respectively. But why should the average investor care? After all, what they lose from the third of buyers who have paid up to a 50 per cent acquisition premium this year on average, they gain from owning the targets. To be sure, equity owners benefit from cash-rich private equity bidding up prices, as have SPACs – special acquisition companies created to raise capital via IPOs. The latter now accounts for 13 per cent of overall deal making. A less understood reason why M&A matters for investors is because it reflects rising return dispersion between share prices (when valuations are bunched together, it makes less sense for companies to pounce on rivals). And when dispersion rises, there is more opportunity to outperform the overall market. Good years for M&A are also good years for stock picking.

    Ways to play: global equities, Asia equities, US equities, emerging market equities

    Global M&A

     

    Emerging debt

    Older bond market hands will read the following list of countries and shudder. Argentina, Mexico, Thailand, Russia, Indonesia, Brazil, South Korea, Malaysia, Turkey – sorry, we’ll stop there. For years emerging debt was synonymous with crises. No longer. In fact, for more than a decade now currency-hedged local government bonds have produced better total returns than even US treasuries, as can be seen in the chart below. And absolute performance has been far from boring. The Bloomberg EM local currency liquid government bond index has risen 60 per cent since the financial crisis, ahead of Bloomberg’s US treasury benchmark by 700 basis points. Better yet, the former has a Sharpe ratio (which measures returns over risk free assets versus the volatility of those returns) double the latter’s. These days it seems, the only thing investors have to worry about with emerging market debt is missing out.

    Ways to play: emerging market debt, Asia fixed income, emerging market high yield

    Emerging debt

     

    China demographics

    Many expect China’s 1.4 billion population to fall when the latest census data is released. A demographic time bomb is ticking, worry some investors, including a famous one, George Soros, who wrote about the consequences of an aging population and shrinking workforce this week. Others say China is the next Japan. Some perspective is needed here. For a start, Japan still managed to grow its economy at roughly the same 1.5 per cent rate as America over the past decade, on a real per capita basis. What is more, China’s dependency ratio (which measures how many kids and oldies are being supported by workers) remains far below other western nations, as can be seen in the chart. And United Nations’ projections don’t have China reaching US and European dependency levels for another half century or so. Besides, China can easily raise its relatively low retirement age to expand its labour force. Investors shouldn’t panic about demographics but rather look into opportunities that benefit from a greying nation, say in healthcare.

    Ways to play: China equities, Asia equities, India equities, healthcare

    China demographics

     

    The ‘S’ in Nasdaq

    In case you missed it while on holidays, the SEC has just approved Nasdaq’s proposed new listing rules. Companies will be required to provide board diversity data and include at least two ‘diverse’ directors. If they don’t, they must have a good explanation for why not. For investors concerned about more regulations dragging down share prices of foreign issuers, don’t fret. Overseas firms are eligible for exceptions. Anyhow, this should be good news for investors. There are 29 Fortune 500 companies leading the way with over 60 per cent board representation by women and minorities. Investing in only these companies would have gained you an additional 90 per cent in returns over the S&P 500 for the past ten years. Notably, there was only one Nasdaq member on that list of 29. Board diversity progress has been slow-moving, as per the chart below. Minority men and women have seen an annual growth rate of far less than one per cent in board representation. Nasdaq is looking to accelerate that, and likely returns with it.

    Ways to play: US equities, ESG investing

    The ‘S’ in Nasdaq


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