Asia: fertile ground for income seekers
The world economy is subject to increasingly uncertainty: There are concerns over the oil price, over global growth, over the likely impact of a US rate hike. Political tensions are rising, from the US election to the EU referendum. In this environment, investors will need to look to companies and markets that may be forging a different path. Asia may be a fertile source of these opportunities.
Looking to new markets is particularly important for income-seekers. This year has seen a number of companies in the FTSE 100 cut their dividends – Barclays, Glencore and a number of the supermarket chains. This shows the dangers inherent in drawing income from a limited number of companies and sectors. Asian companies offer a potential means to deliver both a high and stable income, while also addressing the problem of diversification.
For income seekers, Asia is becoming an increasingly important source of dividend returns. It now makes up 11% of global dividends, only just behind the UK. This looks set to grow as Asian companies improve their corporate governance and a dividend culture takes hold. Underlying dividends grew by 14% in the region during 2015 (1.). The absolute level of dividends also remains relatively high: The FTSE Asia Pacific ex Japan index has a yield of 3.3%, 0.7% higher than for the FTSE World.
Many Asian countries now have a healthy long-term record of growing payouts. Aggregate payouts from Australian companies in 2009 were US$30bn; by 2015, this had grown to USD$46.5bn. In Singapore, they had grown from USD $4.9bn to USD$7.6bn; in Hong Kong, from USD$20bn to USDs$34.5bn. This is in notable contrast to many European countries: France, for example, has seen dividends fall from USD$51.2bn to USD$47bn over the same period.
These countries provide a rich seam of reliable dividend-paying companies that can act as the backbone for a portfolio. For example, we have our highest weighting in Singapore, where dividends have proved resilient through all types of global economic climate. The same could be said for Australia, which has one of the strongest track records on dividend payouts across the globe.
Equally, there are pockets of Asia where dividends are growing much faster. Taiwan and Korea, for example, saw dividends rising 20% and 30% respectively. We are seeing a fundamental shift in the approach to dividends by a number of flagship companies, such as Taiwan Semiconductor. We recently initiated a position in Samsung Electronics on the basis that it is looking to improve shareholder returns and is a potentially important dividend payer.
This exemplifies a wider change across Asia. Previously, many Asian companies did not prioritise paying dividends to shareholders. High dividends were seen as a sign that a company had little potential for growth. This attitude is changing: The demands of global investors and better corporate governance have seen Asia companies commit to increasing their payouts to shareholders. Asia’s strength is that, as investors, we have real choice.
This can also be seen in the underweight positions in our portfolio. We still have relatively low weights in China and Japan, for example. We believe China still needs to find a surer footing in its move to a consumption-driven economy and until then, the pace of growth will moderate. Japan continues to labour under structural weakness and we still cannot find compelling opportunities.
Asian investment provides geographical diversification, but with this comes sector diversification as well. Every international stock market has its inherent biases: the large technology firms tend to be from the US, the oil companies from the UK, financials from Europe. Investing in Asia allows investors to tap into a range of sectors that may not otherwise be available to them.
Equally, those sectors may display dynamics. For example, Asian utility companies will look different to those in the UK. While UK utilities have little potential for growth, infrastructure development is crucial to the long term economic growth across Asia. This gives Asian utilities a different risk reward profile.
There is also a perception that Asia investment merits lie solely in the region’s stronger economic growth and case for investing there has been weakened as the economies have matured and growth slowed. We would dispute this: Certainly, we see Asian growth slowing, but, to our mind, this is not necessarily a negative for dividend investors in the region. With lower growth prospects, company CEOs are being more careful with their capital; rather than spending money on value-destroying acquisitions, they are returning cash to shareholders.
We would also argue that dividend-paying companies tend to show greater defensiveness. Asian markets can be buffeted by the sentiment of international investors. A regular income means investors are ‘paid to wait’, allowing them to ride out periods of volatility. Companies that pay dividends, we find, tend to show a greater commitment to high corporate governance standards and, as such, are more protective.
There are certain areas where economic development is directly related to the long-term growth in dividends. We see this in companies such as SingTel, which continues to benefit from mobile data services growth. The company has a sound capital structure, allowing it to capitalise on its position.
The investment trust structure allows us to manage many of the challenges associated with Asia, while tapping into its strengths. For example, the trust has a healthy dividend reserve and we now pay a quarterly dividend. The closed-ended structure also allows for far better management of volatility. Rather than having to deal with inflows and outflows based on variable market sentiment, we can manage volatility to our advantage. For example, at the moment, we are using market turbulence to buy good quality stocks at more attractive valuations, many of which had been sold indiscriminately with the wider region.
In this type of market environment, diversification is a friend. Looking to new countries, where the economic trajectory is different, and where companies may be subject to different risks and rewards, is a good defence. We believe Asia should be on the radar for many of those seeking income.
- Henderson Global Dividend index report. Edition 9, February 2016
Risk factors you should consider prior to investing:
- The value of investments and the income from them can fall and investors may get back less than the amount invested.
- Past performance is not a guide to future results.
- Investment in the Company may not be appropriate for investors who plan to withdraw their money within 5 years.
- The Company may borrow to finance further investment (gearing). The use of gearing is likely to lead to volatility in the Net Asset Value (NAV) meaning that any movement in the value of the company’s assets will result in a magnified movement in the NAV.
- The Company may accumulate investment positions which represent more than normal trading volumes which may make it difficult to realise investments and may lead to volatility in the market price of the Company’s shares.
- The Company may charge expenses to capital which may erode the capital value of the investment.
- Movements in exchange rates will impact on both the level of income received and the capital value of your investment.
- There is no guarantee that the market price of the Company’s shares will fully reflect their underlying Net Asset Value.
- As with all stock exchange investments the value of the Company’s shares purchased will immediately fall by the difference between the buying and selling prices, the bid-offer spread. If trading volumes fall, the bid-offer spread can widen.
- The Company invests in emerging markets which tend to be more volatile than mature markets and the value of your investment could move sharply up or down.
- Yields are estimated figures and may fluctuate, there are no guarantees that future dividends will match or exceed historic dividends and certain investors may be subject to further tax on dividends.
Other important information:
An investment trust should be considered only as part of a balanced portfolio. Nothing herein constitutes investment, legal, tax or other advice and is not to be relied upon in making an investment or other decision. No recommendation is made, positive or otherwise, regarding individual securities mentioned. This is not an invitation to subscribe for shares in the investment trust and is by way of information only. Subscriptions will only be received and shares issued on the basis of the current Key Facts document. These can be obtained free of charge from Aberdeen Fund Managers Limited, PO Box 9029, Chelmsford, CM99 2WJ.
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A full list of the risks applicable to this investment trust can be found in the factsheet which is available at www.asian-income.co.uk.