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Proxy Vechiles for Investing in Emerging Markets

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On many occasions I have mentioned that emerging markets of India and China will be driven for growth in global economics. For US based dividend investors, there is really a lack of good quality dividend-based investing vehicle(s), and couple that with lack of maturity in financial markets, and we feel we are out of options.

TIP Guy at presented his thoughts on how dividends are perceived at least in India’s corporate world. I am reproducing certain snippets (with author’s permission).


The lack of consistent dividend growth companies in emerging markets can be interpreted in different ways

  1. Emerging economies need very dollar to invest back in their businesses. The cost of external capital is typically higher, and hence it is advisable to use internal resources. Shareholders can get their return by capital appreciation on values of their shares.
  2. The managements are not mature enough to understand the importance of common shareholders, or sharing a piece of profits with shareholders, and/or prudent cash management over longer term.
  3. The taxation policies which do not favor dividend distributions.

I believe most of the corporations in emerging markets are personality driven, and lack any institutional management philosophy. The corporations are primarily driven by personal aspirations (both, good and bad), and as a result the shareholders have miniscule holdings (and contributions). I cannot recall any instance where majority shareholders (other than family and friends) or banking institutions that have been able to make any change. And hence, this has a part in driving the dividend strategies. Common shareholders have such a small percentage holdings that they always remain in back burner.

There are approximately 400 companies in India that have at least paid dividends for last 10 years. However, they have not been growing consistently. Furthermore, the dividend strategies also hinge upon governments taxation policy and cost of available capital. I believe as that as Indian economy grows and competition increases, the cost of capital will come down, and taxation policy will evolve slowly towards friendlier dividends. As of today, at least the dividends are tax free for individuals.

Certainly, there are issues about Indian corporate’s dividend friendliness. However, there are 400 companies that still pay dividends. If we look back 30 or 40 years, I tend to believe that’s how US companies and corporate may have viewed dividends. As US economy matured, few selected companies continued to follow their strategy resulting in Aristocrats’ and Achievers. While I tend to agree that, over time, Indian corporate may evolve towards dividend friendliness, I do not think it is at a point where they can be attractive on its own. There is promise, but it is not yet there.

Until then I believe using US-based multinationals that generate revenue from emerging markets are best proxy for investing in emerging markets. Some examples are:

Full Disclosure: Long on all stocks mentioned in this article.