InvestmentsApr 7 2015

Head to Asia for healthy dividends

twitter-iconfacebook-iconlinkedin-iconmail-iconprint-icon
Search supported by

One of the main effects of the global financial crisis and the ensuing stimulus measures from the world’s major central banks has been compression in bond market yields, which in turn has broadened income investors’ horizons to areas that had long been ignored.

Asia is one such area investors have been looking to.

While expected economic growth rates in Asia-Pacific ex Japan remain attractive compared to the developed world, they are decelerating from the double-digit growth of the previous decade. This moderation in growth, however, seems to have led to an increased appreciation among investors of the role of dividend income alongside the potential for capital growth.

Rather than a recent fad, the Asia-Pacific region has long been a strong source of income. Going back two decades – a period that includes the Asian financial crisis – investment in the region’s equities through the MSCI AC Asia-Pacific ex Japan index would have generated a dividend return of 74 per cent (to the end of 2014), bringing the total return to 155 per cent.

If the same data is run from 1997 (near the end of the crisis), Asia-Pacific equities returned 92 per cent from income alone and the total return was 241 per cent. In comparison, the UK equity market total return over the same period was 84 per cent, of which income was 65 per cent.

Not only does the compounding effect of dividend reinvestment boost equity returns to shareholders, the adoption of a well-defined dividend policy also forces capital discipline on companies’ management teams.

The existence of a healthy dividend culture is evident when one considers that a $100 (£67) investment in the region at the end of 2002 would have yielded a healthy 3.9 per cent in 2003 and the income level from that same initial investment would have grown substantially to yield 9.3 per cent in 2014. Obviously, history does not guarantee future returns, but there is a clear message that the region has provided a significant source of income for many years.

The current environment of slower regional growth should serve to boost this strong existing dividend culture. With corporate cash piles significantly larger following the financial crisis, improved margins and a general reluctance to increase capital expenditure, the likelihood that the cash will be returned to shareholders via one means or another is high.

Much of the historic dividend yield from the region has generally been driven by Australia, which remains one of the highest-yielding markets in Asia-Pacific ex Japan. It is important to understand the divergence among regional markets, not just in terms of yield but also valuations and future growth.

There is a clear difference, for example, between China’s improving capital management in a significant number of companies, where minority shareholders are increasingly rewarded with dividends, and the approach taken in South Korea, which is dominated by family-controlled conglomerates (known as ‘chaebols’) with a poor record of returning cash to shareholders.

The region is also now benefiting from the short- and medium-term effects of last year’s dramatic oil price fall.

In times of rising oil prices, Asia’s status as an energy importer was often regarded as its Achilles heel. As this has reversed, the region has become one of the world’s biggest beneficiaries: Asia consumes one-third of the oil that the world produces, more than either North America or Europe, and China and Japan are the first- and third-largest consumers respectively.

Effectively, the fall in oil prices is a transfer of income from its producers to its consumers and, as the largest consumer, Asia is thus a major beneficiary.

Lower wage earners will be among those who benefit the most, as fuel makes up a higher proportion of their household spending. Less immediately, there should also be an impact on consumers as manufactured goods see an improvement in their cost structures. As Asia tends not to have powerful brands, it is likely companies will pass on lower production cost to consumers through cheaper prices.

While the Asia-Pacific ex Japan region has become increasingly attractive to investors seeking income as well as capital growth, it is still important for them to select countries, sectors and stocks with care, focusing on areas with strong growth prospects and a positive attitude to shareholder cash returns.

Mark Williams is a fund manager at Liontrust

Expert view

HyungJin Lee, head of Asian equities at Barings:

“There has been an increase in investor interest in Asian markets. One reason is that for the past several years, relatively speaking, Asian markets were not the focal point for investors. Rather, markets such as the US have been much more in focus for many investors. But with the normalisation of the growth profile in the US and other global economies, people are looking again to the long-term growth profile of Asia, especially markets in southeast Asia as well as India and, of course, China.

“2015 will be quite an interesting year in Asia. You have the return to a more normal state of affairs for the global economy, while at the same time, China, the largest economy within Asia, is continuing to slow down as its economy rebalances. The interaction of these two large elements will provide a lot of opportunities in both Asian and global markets.”