It’s almost impossible to talk about Asia without mentioning trade wars. They have, alongside Brexit, characterised the political uncertainty that has dominated the global economy.
We see positive and negative stories in the press every single day, and the latest development is the two countries signing an agreement – the so-called phase one deal – to pause the trade war for the time being.
But the truth is that a permanent solution is unlikely to be found in the next year or so. China – despite its own economic slowdown – is only going to grow as a threat to the United States’ leading role on the global stage. A lengthy wrangle is an unwelcome scenario for both countries as it could see a slowdown in business investment and capital expenditure.
In October, the International Monetary Fund said as much when it highlighted the prolonged global policy uncertainty, distorting trade measures, and growth deceleration in the economies of important trading partners, as key factors influencing the economic growth in Asia and the Pacific. It said growth in Asia is expected to moderate to 5% in 2019 and 5.1% in 2020* – a figure which is lower, but still ahead of the global figure of 3.4% for 2020*.
Asia has always been a hotbed for investors looking for growth and who can blame them? This year the region is expected to overtake the GDP of the rest of the world combined** – and is expected to account for 60% of GDP in 2030. Geopolitical concerns may only slow – rather than stop – what appears to be an irreversible trend.
But are investors missing out on the income opportunity by being pure growth hunters in the region? Perhaps so, given a recent article by Schroders which alluded to the fact that despite the focus on capital appreciation, two-thirds of the long-run equity returns in the region have historically come from dividends**.
Why is the dividend outlook improving?
As the above figure suggests, the case for dividend investing has always been there, but there have also been economic and political changes that make the focus on dividends in Asia more attractive than ever.
The first is that many central banks in Asia have followed the global trend by being more dovish and cutting rates in 2019. This was an attractive move at a time when geopolitical uncertainty has hampered growth.
There have also been numerous attempts by various governments in Asia to cultivate a better environment for dividend payouts. Examples include the Shanghai Stock Exchange encouraging companies to pay more than 30% of profits as dividends in 2013; Korea introducing a penalty tax on excess capital holdings to promote higher dividends in 2014; and the Securities and Exchange Board of India making dividend policies mandatory for the top 500 listed companies in 2016***.
The result is the income opportunities are increasing. At a recent meeting with Fidelity Asian Dividend manager Jochen Breuer, he referenced the political support for companies to pay dividends. In addition, figures from FactSet MSCI from last year showed that Asia Pacific ex-Japan now has the second highest dividend yield globally, behind Europe. Valuations are also reasonably attractive for high dividend yielding companies in Asia when compared to their historical numbers since the financial crisis****.
Ideal environment for Asia dividend paying stocks
There is a strong argument to suggest the environment is ideal for growth of dividend paying stocks in Asia, particularly as low interest rates look like they’re here to stay in the West for the foreseeable future. It’s an area of the market which has been increasingly represented in our managed funds and is likely to grow in the future, as we move away from the traditional income paying areas of the market.
Those looking for exposure to Asian income funds may want to consider the Jupiter Asian Income fund, managed by Jason Pidcock, which targets large companies with reliable dividends that can deliver both income and growth for investors. The fund’s typically higher developed market holdings, notably in Australia, tends to make it a relatively defensive Asia Pacific option.
Another to consider is Guinness Asian Equity Income fund which invests in 36 companies, all of which have an equal weighting in the portfolio. Managers Edmund Harriss and Mark Hammonds say this, together with their one-in, one-out policy, means each stock can make a meaningful contribution to performance.
The Schroder Oriental Income trust is an alternative for those going down the closed-ended route. Manager Matthew Dobbs believes long-term returns are driven by valuation considerations, but he is willing to exploit other opportunities if the investment case is strong enough. The portfolio typically holds 60-80 stocks.
*Source: IMF – World Economic Outlook October 2019
**Schroders – Rate cuts push case for Asian Dividends – August 2019
***JPM, Merrill Lynch
****Factset, Schroders July 2019
