Shares of emerging markets asset manager Ashmore Group (LSE: ASHM) rose by nearly 3% this morning, despite the group reporting a 4% fall in assets since the end of September.
Today Ill consider the safety of Ashmores 5.9% dividend yield, and explain why investors are still taking an optimistic view on the firm. Ill also look at another emerging markets-focused financial stock I believe could deliver big returns in 2017.
Bouncing back fast
Ashmores assets under management fell by $2.4bn to $52.2bn during the final three months of 2016. This fall had two parts net fund outflows of $0.7bn, and negative investment performance of $1.7bn.
This may sound like a weak performance, but its worth remembering that this period included the US presidential election. Trumps victory caused a widespread sell-off of emerging market debt, which is Ashmores speciality.
The firm says that it performed strongly relative to its benchmarks throughout the quarter and over 2016 as a whole. Assets under management rose by 5% last year. Chief executive Mark Coombs said this morning that the effect of the US presidential election had been short-lived and that asset prices have been rising again since December.
Mr Coombs expects strong performance and an improvement in customer inflows in 2017. The question for investors is whether earnings and cash flow will improve fast enough to protect the groups 16.7p per share dividend, which is barely covered by forecast 2016 earnings of 18.1p per share.
My feeling is that this payout which would give a yield of 5.9% at current prices will probably be maintained. Ashmore is highly cash generative and if trading improves as expected this year, the groups dividend will rapidly become more affordable again. Id be happy to buy at current levels.
40% upside for investors?
Ashmore isnt the only London-listed financial stock focused on emerging markets. Another contender is FTSE 100 bank Standard Chartered (LSE: STAN). The City is still cautious about this bank, but I believe this could be a contrarian buying opportunity.
The Asia-focused banks latest numbers showed a steady fall in bad debt levels and stable profits. Although earnings remain very low by historical standards, the banks financial strength is improving.
Standard Chartereds common equity tier one ratio (CET1) has risen from 11.5% to 13% over the last 18months. Return on equity turned positive during the first half of last year, after 2015s full-year loss.
Theres still a long way to go, but its worth noting that current forecasts suggest that Standard Chartereds earnings per share will rise from $0.21 in 2016 to $0.50 in 2017. If the group can achieve this kind of momentum, Id expect investors to become more confident in the quality of the banks assets.
In turn, this could lead to a rapid re-rating, of the kind weve seen over the last six months at Barclays (+54%) and HSBC Holdings (+41%). Standard Chartered stock currently trades at a discount of about 30% to its tangible book value. I believe that gains of 30%-40% should be possible from current levels.
Roland Head owns shares of Barclays, HSBC Holdings and Standard Chartered. The Motley Fool UK has recommended Barclays and HSBC Holdings. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.