Time to refocus on Asian income outcomes?

Investing in Asia has historically been focused on growth opportunities by using the region as a play on global gross domestic product (GDP) and export growth.

Instead, we believe more attractive risk and reward characteristics can be found by focusing on income as well as growth in the region.

We advocate diversification into Asia and focus on companies that can continue to pay dividends during times of macroeconomic uncertainty. Dividends play a key role in total returns for Asian investors and are the bedrock of income strategies.

In the new regime of higher interest rates and inflationary pressures, there is likely to be more volatility. As such, we think it is important to be selective within any dividend-focused approach.

Coupled with a change in growth dynamics, investor perspectives on investing in Asia could also be changing. Over the last decade, China’s internet platform companies have become a large part of the benchmark. However, valuations have been affected by regulatory concerns. We think this illustrates one of the pitfalls of focusing only on growth strategies in the Asia region, where valuations are not grounded by dividends.

By way of example, our Asian income portfolios are currently overweight in Singapore, which plays host to many companies with strong balance sheets and decent payout ratios. There is a lot of wealth and trade that goes through Singapore from its neighbouring nations. Banks in the region also have well-capitalised balance sheets and the ability to sustain higher dividends for years to come.

Another overweight is Taiwan, on the basis of opportunities around its many technology companies. We also see merits in Indonesia, which in our view emerged from the so-called ‘taper tantrum’ of 2013 stronger from current account and fiscal perspectives. We see strong growth coming out of that economy and think this is likely to continue.

We also believe India offers significant potential given its long-term demographics, strong consumption and household income growth, as well as growing levels of urbanisation. In other parts of Asia, ageing populations are supportive for income strategies because, as people grow older, there is a greater need for income to fund them in retirement.

Chipping in

On a thematic level, the technology sector provides investment opportunities. We believe artificial intelligence (AI), or more specifically companies supplying the hardware for AI, present interesting opportunities. Many of the technology companies held in our Asian Income strategy have net cash balance sheets and pay dividends, and we expect the AI industry to increase dividends as profits grow in the coming years.

Overall, we are broadly looking for balance-sheet strength, strong business models, and companies that have economic moats that give a competitive advantage. In other words, we favour quality franchises, with a degree of pricing power, which maintain profitability and margins – and pay dividends. Especially with Asia, we think the capital growth component of a portfolio’s total return is more volatile and less dependable than the income component.

By harnessing the potential of dividends and dividend growth, it is possible to compound total returns in a more consistent fashion than by trying to target growth on its own.

A version of this article first appeared on Morningstar.co.uk

Authors

Zoe Kan

Portfolio manager, emerging markets and Asia equities team