Mazzurana (Capital Group): “Coupons and dividends will come back into fashion”

Mazzurana (Capital Group): “Coupons and dividends will come back into fashion”

After the big rally in technology stocks, it’s time to look at drivers of returns other than rising stock prices. Dividends and coupons could soon attract investors’ attention again. She is convinced of this Cristina Mazzuranamanaging director Financial intermediaries of Capital Groupaccording to which the economic slowdown could act as a turning point on the markets

What is your opinion on the economic prospects of emerging markets?

“Infrastructure growth is accelerating, government budgets are stronger and changes in supply chains are providing impetus to local economies. Think of India. New roads, housing developments and industrial parks are helping parts of the country are unrecognizable from even a few years ago. Indonesia is attracting foreign investment to build its electric vehicle supply chain. Mexico, however, is becoming a hub for relocalization. Despite the slowdown in the Chinese economy, we believe that a variety of long-term trends, such as rebuilding supply chains, demographic shifts and the energy transition, may bring more depth to emerging markets than ever before. Investment opportunities range from banks to aircraft component manufacturers passing through real estate development companies, mining and consumer goods companies. At the same time, the rapid expansion of mobile technology platforms is tapping into demand for consumer services. But let’s not discount China as a whole. A strong sell-off has created specific opportunities to invest in innovative companies with significant market shares in their home country, abundant cash flows and attractive valuations.”

What impact will the end of central bank tightening have on emerging market bonds?

“A more dovish Fed should benefit core emerging countries that are on the front line with rate cuts and frontier economies that have to face high external financing requirements. For the former, the drop in US rates should allow central banks to steer monetary policy in a direction that better reflects their domestic outlook. In most core economies, inflation is expected to decline over the course of the year, allowing for a reduction in policy rates. The decline in interest rates should provide a duration boost for holders of local currency debt. Hard currency spreads generally already reflect strong fundamentals, but select holdings can offer spread enhancement and diversification benefits. Instead, many frontier economies are struggling with rising US rates; therefore, a more dovish Fed should benefit these economies by reducing external financing pressures and encouraging investors to look to lower-rated economies for yield. That said, headwinds remain and local currency and hard currency holdings should be selected on a case-by-case basis.”

On the equity front, how do you identify the best stocks among those that pay a rich dividend?

“As investors were swept up in AI euphoria, valuations of dividend-paying stocks quietly slipped to multi-decade lows relative to the market as a whole. With slowing growth expected in 2024 and the looming risk of a recession, dividends may become more important as a driver of total returns for investors. It is difficult to predict when the turning point in the cycle will occur, so investors would be wise to look for companies with growth potential but also companies that pay dividends, which can help mitigate market volatility.Valuations are important, but it is essential to distinguish between companies that possess real value and those whose prospects are deteriorating. A number of dividend-paying companies across a wide range of industries are adopting strategies to stimulate demand for their products and services. The pharmacy chain CVS Health, for example, is launching a new division that will work with drug manufacturers to create biosimilar versions of the main reference therapies that will make them much more accessible from an economic point of view, while the drinks company Keurig Dr Pepper has historically enjoyed stable demand across economic cycles compared to brands like Canada Dry and Snapple. For investors worried that a handful of tech giants operating in similar fields will take on too much weight in their portfolios, dividend-paying companies can offer both diversification and income.”

The returns of the large emerging markets; cumulative overall return (%). Source: Capital Group processing

Do you also find the returns on high yield bonds attractive?

“Under the right conditions, high yield bonds can offer solid income potential. Despite the risk of reduced earnings growth and cash flows for many companies in 2024, especially those with high levels of debt, As long as economic growth has remained positive, high-yield bonds have historically performed well. Even if spreads widen versus Treasuries, with yields around 9%, the income component could help generate positive performance. asset class can be used within an equity or bond allocation, possessing characteristics in common with both types of securities.Although the refinancing needs of many high yield companies have come under the magnifying glass of the markets, the majority some of them will not hit the ‘maturity wall’ before 2026. Furthermore, the overall credit profile of the segment has improved as companies characterized by a higher level of risk have switched to private credit as a source of financing. Investors have priced in a rise in default rates to 4-5% in 2024. Stock selection remains key. Technology companies with recurring revenues are attractive, while issuers rated CCC or lower require a more selective approach.”

Cristina Mazzurana, managing director of Financial intermediaries of Capital Group

Cristina Mazzurana, managing director of Financial intermediaries of Capital Group

Do corporate and mortgage bonds offer attractive income opportunities?

“Investment grade credit remains attractive with good income opportunities. Fundamentals continue to show that companies are in good health, with interest coverage still high and refinancing risk low. Despite the strong rally in Q4 2023, Yields remain elevated relative to levels of much of the last decade, and while spreads are tighter, dispersion remains relatively high, creating idiosyncratic opportunities for active investors.The same is true for mortgage-backed securities (MBS). , whose valuations remain attractive despite the recent tightening of spreads in the last quarter. The MBS sector has lagged significantly behind other areas of the market and, in our opinion, offers an attractive risk/return ratio.”

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