With the asset class back in focus for some time, the asset manager has argued several key trends are becoming even more favourable for emerging markets (EM).
Aberdeen Investments sees a new investment cycle taking shape which could further strengthen the outlook for EMs.
It comes as the US economy has faced headwinds this year from trade uncertainties and a weaker dollar, seeing EMs increasingly enter the spotlight.
Writing in a recent note, Matt Williams, the firm’s senior investment director, said this new cycle will be defined by trends such as digitalisation, decarbonisation and defence.
“Historically, EM performance has been tied to the global investment cycle, and we believe we are embarking on a new one. We expect good growth in several sectors, including technology,” Williams said.
As technology owners and low-cost green metal resource providers, he argued that EMs are uniquely placed to benefit.
By way of example, he pointed to technology hardware firms such as semiconductor manufacturers, which he described as the foundational building blocks of the digital economy and the artificial intelligence (AI) boom.
“We are also witnessing substantial demand for data centres that will power our digital economies. This demand has triggered the need for infrastructure investment in antiquated electricity networks,” he added.
Williams also highlighted the ongoing replacement cycle in the shipping industry, driven by the demand for greener technologies and increased defence spending – areas where EM economies are expected to play a key role.
Aberdeen is not alone in backing EMs as a growth driver, with Amundi recently reaffirming its positive outlook on the asset class from last year.
Dual appeal: income and growth
Williams also argued that emerging markets now offer investors an attractive mix of income and growth, with more EM companies now paying dividends on par with those in developed markets.
Referring to a March Bloomberg report, he noted that since 2001 the share of dividend-paying EM companies has risen to around 85 per cent – similar to that of developed markets.
According to the report, EM dividends have outpaced developed markets since the early 2000s, achieving a 20-year compound annual growth rate (CAGR) of roughly 12 per cent.
“Investors can access attractive income opportunities through EM equities,” Williams said.
He also pointed to global investment bank Jefferies’ 2023 annual report, which found that nearly 40 per cent of emerging market companies paid dividends above 3 per cent, with energy sector yields exceeding 6 per cent and real estate over 4 per cent per year.
“Jefferies, 2023 actual, reported that since December 2000 dividend returns in EM have been among the highest relative to other regions, with half of investor returns coming directly from the compounding effect of dividend payments.
“In addition, the price return component, which represents the other half of investor returns, is primarily driven by cash flow growth, which in turn fuels dividend growth,” Williams explained.
Williams added he expects this characteristic will persist since EM companies are increasingly viewing dividends as a key tool to draw investors.
He concluded that for income-focused investors, EMs are becoming an increasingly attractive option, offering a rare mix of sustainable high dividend yields and strong growth potential.
“By leveraging the high and growing income in EMs, we believe that active investors may access attractive opportunities as part of a diversified portfolio capable of generating strong total returns.”
