Better Governance, Rising Middle Class Spur Emerging Market Dividends

“The obvious example is India, where we recently bought a bank stock at a premium,” he said. “This was unheard of in India but today, because of better governance standards and better regulation, first of all, and then because of a middle class of 400 million with money to spend, which is driving everything, companies are clearly doing better and dividends are clearly rising. “

Although the Henderson reports expects dividends to continue growing in 2015 and companies in emerging markets to be among the stronger players, there are nevertheless certain challenges to dividend increases.

For one, a number of emerging market countries have heavy exposure to commodities – iron ore, oil and so on — and this is putting downward pressure on earnings, said Henderon’s Global Equity Team member. Outside of commodities growth has also slowed for other reasons: In Brazil, for example, high inflation leading to high interest rates has squeezed growth and sanctions have been imposed on Russia. And for overseas investors downward pressure on currencies has also meant that dividends have struggled to grow in U.S. dollar terms, the team member said.

Some investors are also wary about the progress of corporate governance, and particularly in the case of China, don’t quite consider it a fait accompli.

According to Matthews Asia strategist Andy Rothman, who wrote a recent piece on the topic, China’s rulers have not dealt properly with the most important long-term obstacle to the country’s growth: The rule of law. Without rule of law, Chinese people have seen rapid income growth. But the status quo may not be acceptable to a society that enjoys greater wealth and personal freedom, Rothman said, and though failure to reform legal and governance systems does not present a short-term risk for investors, it could hinder growth prospects over the long-term.

China is also undoubtedly dealing with significant unproductive capacity expansion, the Henderson Global Equity team member said, whether that’s in steel mills, property, or in local government spending on infrastructure projects.

On the positive side, though, the tightening measures that China put in place to curb inflation are starting to have an impact and the authorities have recently been making more moves towards monetary easing, as evidenced by surprise interest rate cut a few days ago. This should help both on the macro level and also benefit the corporate sector.