The div­i­dend yield of the iShares MSCI Emerg­ing Mar­kets Index Fund (EEM) recently moved above the div­i­dend yield of the iShares S&P 500 Index Fund (IVV) for the first time since the 2008/2009 finan­cial crisis.

Sources: iShares; Plexus Asset Management.

Sources: iShares; Plexus Asset Management.

The 76% increase in the div­i­dend from EEM for the six months to June put the fund’s div­i­dend yield on par with that of the IVV, but the con­tin­ued mar­ket tur­moil resulted in emerging-market equi­ties sig­nif­i­cantly under­per­form­ing the S&P 500 Index.

Sources: iShares; Plexus Asset Management.

The sell-off resulted in the ratio of the div­i­dend yield of the EEM rel­a­tive to that of the IVV lin­ger­ing close to the peaks that pre­vailed dur­ing the 2008/2009 crisis.

Sources: iShares; Plexus Asset Management.

The severe under­per­for­mance of the EEM in 2008 was jus­ti­fied as div­i­dends were slashed by 30% over the fol­low­ing 12 months.

Sources: iShares; Plexus Asset Management.

By com­par­ing the EEM’s under­per­for­mance against the IVV this time round, it seems that the mar­kets are antic­i­pat­ing a cut of the same pro­por­tion over the next 12 months.

Sources: iShares; Plexus Asset Management.

Is the cold shoul­der the mar­ket is giv­ing emerging-market equi­ties jus­ti­fied at this stage? I would say not. Dur­ing the 2008/09 cri­sis the emerging-market cur­rency I derived at by divid­ing the MSCI Emerg­ing Mar­ket Index in US dol­lar by the MSCI Emerg­ing Mar­ket Index in local cur­rency terms fell by 22% and there­fore con­tributed to the bulk of the slash in div­i­dends. This time round the same MSCI Emerg­ing Mar­ket Cur­rency Index fell by only 7%. I am not pro­fess­ing that fur­ther depre­ci­a­tion is not on the cards. What I am say­ing is that given the cur­rent state of affairs the sig­nif­i­cant der­at­ing of emerging-market equi­ties is not jus­ti­fied in light of div­i­dend expectations.

In pre­vi­ous arti­cles I argued that the val­u­a­tion of the S&P 500 as mea­sured by Robert Shiller’s PE10 is highly influ­enced by anx­i­ety lev­els as rep­re­sented by the VIX. The rela­tion­ship between the div­i­dend yield on the IVV and VIX is another exam­ple of that.

Sources: iShares; Plexus Asset Management.

The val­u­a­tion of emerging-market equi­ties is also influ­enced by finan­cial mar­ket anxiety.

Sources: iShares; Plexus Asset Management.

The val­u­a­tion of emerging-market equi­ties is more highly geared to anx­i­ety than the val­u­a­tion of the S&P 500 Index as emerging-market equi­ties are der­ated rel­a­tive to the S&P 500 Index dur­ing times of height­ened anxiety.

Sources: iShares; Plexus Asset Management.

One aspect that came to the fore in my analy­sis is that since the mid­dle of last year emerging-market equi­ties were der­ated rel­a­tive to the S&P 500 Index before anx­i­ety lev­els or mar­ket volatil­ity increased.

Sources: iShares; Plexus Asset Management.

It appears as if the lead time is approx­i­mately 20 trad­ing days. With the div­i­dend yield of the EEM remain­ing at ele­vated lev­els rel­a­tive to the IVV, it seems to me that we can expect volatil­ity lev­els as mea­sured by the VIX to remain high and move even higher over the next 20 days.

Sources: iShares; Plexus Asset Management.

A strong rever­sal in the rel­a­tive div­i­dend yield will there­fore be the lead­ing indi­ca­tor for the VIX to decline. But until then the rest­less­ness in the mar­kets will per­sist and the roller-coaster ride will continue.

Dr. Prieur du Plessis is an investment professional with 26 years' experience in investment research and portfolio management. More than 1,200 of his articles on investment-related topics have been published in various regular newspaper, journal and Internet columns, including his blog, Investment Postcards from Cape Town. He has also published a book, Financial Basics: Investment. Prieur is Chairman and principal shareholder of South African-based Plexus Asset Management, which he founded in 1995. The group conducts investment management, investment consulting, private equity and real estate activities in South Africa and a number of foreign countries. He also serves as Honorary Consul of Slovenia for South Africa, actively developing economic, cultural and scientific relations between Slovenia and South Africa. Prieur is 54 years old and live with his wife, television producer and presenter Isabel Verwey, and two children in Cape Town, South Africa. His leisure activities include long-distance running, traveling, reading, motor-cycling and scripophily. Read more from the author/contributor here.

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