Mike Kerley, fund manager for Henderson Far East Income investment trust, explores the growing potential for reliable income in the Asia-Pacific region.
Asian equity markets are an exciting place to be invested. The region has been playing catch-up with the West for decades, but now we are seeing some Asian companies overtake Western rivals in domestic markets and they have their sights set on becoming global market leaders in the years to come. The sheer size of the region means it is impossible to ignore: more than half of the world’s population call it home, which means resources, capital and consumer goods will flow into Asian markets as the years go by.
The largest and most powerful market in terms of economic growth is China. Its economy is the largest in the world (in purchasing power parity terms), and the country was home to five of Forbes’ top 10 largest public companies in 2018 – with the US providing the other five.
Any prudent investor would rightfully be concerned about the so-called ‘trade war’ between the US and China, which has escalated as we have gone on through the year. When the first signs of the trade war emerged, I didn’t think it would carry on, because it’s not in the best interests of anyone. It’s difficult to see how either side pulls back now, however, because both Donald Trump and Xi Jinping want to win.
As a result, we have trimmed some positions in the Henderson Far East Income (HFEL) portfolio that were exposed to global trade – not much because we didn’t have that much to start with, but where there is exposure we have reduced it.
From a China perspective, we think they are handling what’s going on pretty well. We have seen some loosening measures in reaction to tariffs on trade; and although the currency is a bit weak, we think it is in control at this point, so we’re not worried.
Companies from China account for more than 25% of the HFEL portfolio and it’s a country I believe will only continue to grow in corporate stature. Historically, companies in the US have grown over the years because they have been at the cutting edge of new technologies and new areas of growth. Asia has generally been associated with the low-cost stuff – but now that’s changing. China is at the forefront of this change, and we believe that for the first time ever China will spend more on research and development (R&D) this year than the US; within five years we think it may spend more than the EU and US put together. This is a huge shift, and it’s in new areas such as electric vehicles, renewable energy, healthcare, artificial intelligence and virtual reality – things we will embrace in years to come and that have the potential to become part of our day-to-day lives.
Risks for foreign investors
The caveat for any investor wanting exposure to China’s impressive growth story is the different expectations and cultural differences between the West and China with regard to corporate governance. There are important differences that investors need to be aware of before putting money into China. These issues are covered in detail for investors interested in China in Janus Henderson’s ‘Signals and Smokescreens’ report, which is based on proprietary research for the purpose of educating investors about the intricacies of Chinese equity markets.
Asian income opportunities
Of course, Asia is bigger than China, and opportunities are rich across the region. For income, there are a few countries that stand out for their dividend-paying records, most notably Taiwan and South Korea, where payouts have risen almost 150% in five years, three times faster than the Asia Pacific (ex Japan) average.
The largest increases in Taiwan have been from chemicals companies, whose dividends have risen sevenfold in five years, while banking and technology have also seen rapid growth. In South Korea, one quarter of the total is contributed by Samsung Electronics, whose payouts have almost quintupled since 2013.
Australian companies contributed 25% of Asia-Pacific (ex Japan) dividend payments in the 12 months ending 31 July – more than any other country. Dividend growth in the past five years, however, has not been as exciting in Australia – but that’s mainly a result of the country’s mature, high dividend-paying financial sector, which has less room to grow.
China and Hong Kong are the second and third largest dividend-paying states behind Australia, with Chinese and Hong Kong dividends accounting for £2 in every £5 of dividends paid in Asia Pacific (ex Japan).
Singapore, Malaysia and Thailand have lagged behind, but for different reasons. Singapore’s slow growth can be attributed to many of its larger, mature companies, whereas in Malaysia and Thailand there have been pockets of weakness, for example in telecoms.
That said, I prefer to divide the region by sectors rather than on a country-by-country basis. Right now there is a lack of supply in Asia of materials, particularly those needed to fuel the continent’s vast construction industry. For example, steel and cement companies are benefiting from a lack of supply to meet demand, with higher profitability, cash flow and dividends.
Elsewhere, the energy sector is looking very interesting now. Even with the transition to renewable and sustainable energy, oil companies in Asia are performing well and offer attractive yields. Financials are big payers in the region, but growth is slow and we’ve been trimming our exposure to the financial sector.
Telecoms were responsible for 12% of the region’s dividends in 2017/18, while technology is responsible for one 10th of dividend payments. In fact, technology companies accounted for half of the total payouts in Taiwan in the past year.
Looking at the region in this way, by sectors rather than geographies, is the way I like to identify opportunities there. Income opportunities are plentiful and dividends are growing, particularly in the emerging economies, while the developed sectors in mature markets such as Australia’s financial sector are where you can find companies with already high dividend yields.