Investment risks are changing in Asia, and income opportunities are rising.
Key points
- Asia has the cash to pay out more dividends today than in other periods.
- Inflation may be trending upwards in Asia, but it is still lower than in the US and UK.
- China’s woes are potentially obscuring attractive opportunities, particularly in value and income stocks.
China may dominate Asian markets, but it is not the only investment story in the region. In fact, China’s woes may be obscuring attractive opportunities, particularly in value and income stocks.
Asia has the cash to pay out more dividends today than has been the case historically. This is a result of lower gearing by companies, compared with elsewhere in the world, which is helping to sustain shareholder payments.
Asian markets have sold off in line with other world markets but longer-term growth across the region remains intact. Inflation may be trending upwards in Asia, but it is still lower than in the US and UK. Much of the region is only just coming out of Covid-19 lockdowns and reopening borders, meaning the full recovery story has yet to be played out. Foreign-exchange reserves in many countries in Asia are strong. Policymakers may therefore have more flexibility than those in the West to try to balance growth.
There are issues with regards to China, but they should not be conflated with other Asian opportunities. Asia’s potential tends to be referenced alongside China’s growth trajectory, but it is not always about the giant economy. In the future, we believe compounding income will be much more important as a driver of investment returns across Asian markets.
China’s problems
In terms of the downfall in some of China’s leading technology and internet companies, much of the turbulence was attributable to China’s regulatory crackdown, a by-product of its desire to control more of its own economy – part of President Xi Jinping’s ‘common prosperity’ drive. The prevalence and popularity of online platforms has seen their influence grow, particularly in e-commerce and mobile payment areas.
Meanwhile, China’s strong stance on Covid-19 policy this year has inflicted much pain on the economy, while the authorities there are running out of the proverbial tools. China’s hands are tied with regards to the policy response – especially given the trajectory of monetary policy elsewhere.
Even if China removes Covid-19 restrictions and relaxes its grip on internet companies, the country faces long-term economic and demographic challenges. We may well get a short-term bounce in China’s equity markets given how far they have fallen. But then what? In our view, generating long-term returns from Asia calls for a repeatable and sustainable investment process based around good quality dividends and disciplines.
We believe the Asian income portfolios we manage are partly insulated from China’s woes because of their avoidance of China’s state-owned enterprises. We have a highly selective approach to investing in China and hence have long been underweight the country in the income portfolios we manage.
Authors
Zoe Kan
Portfolio manager, emerging markets and Asia equities team
This is a financial promotion. These opinions should not be construed as investment or other advice and are subject to change. This material is for information purposes only. This material is for professional investors only. Any reference to a specific security, country or sector should not be construed as a recommendation to buy or sell investments in those securities, countries or sectors. Please note that holdings and positioning are subject to change without notice. Compared to more established economies, the value of investments in emerging markets may be subject to greater volatility, owing to differences in generally accepted accounting principles or from economic, political instability or less developed market practices.
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