Why our attitude to emerging markets is changing

With more companies open to the idea of paying dividends, Elliot Farley, co-manager of the T. Bailey Growth fund, says emerging markets are no longer just about capital growth.

The political and economic twists and turns of the past few months view like scenes in a summer movie blockbuster.

At times like this perhaps the Sage of Omaha can be a source of comfort.

Warren Buffett reminds us: “In the 20th century, the US endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497."

Sometimes you can be so engrossed in the drama and personalities you can miss the broader picture.

Avert your eyes from Europe and you will see that around the world, economies are still growing.

The picture may well be one of softer growth where Western nations have a tougher time over the coming decade as they unwind their indebtedness. Yet, consensus estimates for world growth overall is that it will run at around 3% per annum over the next few years.

Such a situation, however,leaves little margin of protection for exogenous shocks.

Indeed, there is quite an historic coincidence in the US (at least during the last 30 years) of a fall in GDP growth below 2% indicating the start of recessionary periods.

But I am more confident about the US economy and think it can remain in positive territory. As a result, following the gloom of the summer, equities particularly look relatively attractive for the longer-term investor.

Since 2008 we have seen companies in the developed world cut costs, reduce their debts and drive efficiencies.

Dividend focus

UK growth may only be running at a shade more than 1%, but many good companies are yielding 5%-6% at today’s prices. (Governments in contrast have taken on huge debt burdens, increasing risk and making gilts, delivering nominal yields of around 2%, thoroughly unattractive against an inflationary backdrop of 5%.)