In the West the grasp for yield has become a protracted theme for investors. Income hungry, they have been forced to search in non-traditional income asset classes amid compressing bond yields from expansionary central bank policies. The UK government now rewards you a mere 0.6% a year if you lend to them for 10 years. In Germany you’ll need to pay them to take your money. As the risk-reward dynamic has become skewed, income-yielding equities have never been more en-vogue.
But what of the more traditionally high yielding markets such as those in Asia?
In the past, heavyweight Asian investors such as large pension funds and sovereign wealth funds have tended to allocate their cash towards fixed income assets and property. This made sense. With yields significantly higher than Western markets, exposure to the additional capital risk in equities would have been nonsensical.
Recent evidence points to a shifting landscape in this regard. Look at data from the region’s stalwart economy – China (see chart below) – and you’ll see yields have been steadily dropping across a number of income asset classes: government bonds, corporate bonds, property, and even wealth management products. The latter offer fixed-term pay-outs based on underlying assets and have been hugely popular among retail investors. Some of the non-bank wealth management products (WMP) offered fairly high (and unsustainable) yields in the past due to the spurious assets underpinning them, and are now facing a government clampdown. Similar products sponsored by banks are deemed safer, but yields have contracted to below 4% and that of the main H-Shares equity market in Hong Kong (HSCEI) and a growing number of shares listed in Shanghai and Shenzhen, China – a far less compelling proposition than 12 months ago.
Overall, the effect has been to squeeze all of the traditional avenues for income, making equity yields – rising on account of the improving corporate attitudes towards shareholders and increasing pay-out ratios (the percentage of net income paid out as dividends) – an increasingly attractive income proposition on a risk / reward basis. The picture is reflected across most Asian markets.
Source: Henderson Global Investors; Morgan Stanley: as at 17/08/2016.
HSCEI – Hong Kong Seng China Enterprises Index
How are investors reacting?
Institutional investors, cognizant of the eroding value in traditional income asset classes, have been changing their allocations towards equities for the first time in history. In Taiwan the risk-based capital requirements for insurers and pension funds have been raised, which could attract between $25 and $35bn towards equities over the next five years. Singapore’s sovereign wealth fund, GIC, is in talks to buy 7% of Vietcombank in Vietnam. In India, the biggest retirement manager has recently been permitted to invest 5 – 15% of new assets in equities, where before they had not been allowed.
And the tendency has been for dividend paying stocks with low betas – those of lower volatility when compared with the wider market. A market-cap weighted index of 44 Asian stocks with dividends above 3% and betas of between 0.8 – 1.0 (less than one implies lower volatility than the market; more than one implies greater) has been climbing, especially since the Bank of Japan introduced negative interest rates.
A wholesale change?
Thus far, the steps towards Asian equity income have only been tentative. In Thailand 17% of the top pension funds have assets in stocks, compared with 61% in Hong Kong, according to the Organisation for Economic Cooperation and Development (OECD).
It is the demand potential from retail investors that could be game-changing however: as a percentage of Gross Domestic Product (GDP), China has a savings rate of 49% versus a world aggregate of 24%, a US rate of 18%, and 12% in the UK, according to the World Bank. With China’s GDP at around $11trn, the savings portion is eye-watering. And with savers receiving the same lacklustre yields as institutional investors even a small allocation switch has the potential to move significant sums of cash into the equity markets. It paints a picture of potentially rampant domestic Asian equity demand.
In our portfolios the strategy has been to aim to provide a blend of income-yielding equities with lower yielding equities with the potential for dividend growth. We believe this mix – with improving corporate governance and attitudes towards shareholder value and dividend pay-outs – provides our investors the opportunity to diversify their income stream away from Western markets and gain exposure to the undeniable change afoot in Eastern markets.
Before investing in an investment trust referred to in this document, you should satisfy yourself as to its suitability and the risks involved, you may wish to consult a financial adviser.
The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.
Nothing in this document is intended to or should be construed as advice. This document is not a recommendation to sell or purchase any investment. It does not form part of any contract for the sale or purchase of any investment.
Issued in the UK by Henderson Global Investors. Henderson Global Investors is the name under which Henderson Global Investors Limited (reg. no. 906355), Henderson Fund Management Limited (reg. no. 2607112), Henderson Investment Funds Limited (reg. no. 2678531), Henderson Investment Management Limited (reg. no. 1795354), AlphaGen Capital Limited (reg. no. 962757), Henderson Equity Partners Limited (reg. no.2606646), Gartmore Investment Limited (reg. no. 1508030), (each incorporated and registered in England and Wales with registered office at 201 Bishopsgate, London EC2M 3AE) are authorised and regulated by the Financial Conduct Authority to provide investment products and services.