Asia: investing for growth and income

It is almost impossible to talk about Asia today, without mentioning trade wars. And, while some progress has been made, China posses such a threat to America’s dominance on the world stage, that any permanent resolution is unlikely to be found this year, or even next.

This is bad news for companies on both sides – and indeed has a knock on impact to the rest of the world – as business investment and other capital expenditure could be put off.

However, as we have seen closer to home with ongoing Brexit uncertainty, there are still opportunities to be found and volatility can also create opportunities if you are willing to live through the ups and downs and think for the long term.

We asked a number of Asian equity fund managers for their thoughts on the region:

Asia remains dynamic and compelling

On the bright side, Asia is a dynamic and compelling investment universe offering attractive portfolio diversification options. “The largest Asian companies are still just a fraction of the size of the largest US companies – and some are likely to have much further to grow,” commented Jason Pidcock, manager of Jupiter Asian Income fund. “But this growth potential can be underappreciated, despite many companies across the region offering scalable business models as well as attractive dividend yields and / or dividend growth.

“Some of the best investment opportunities in Greater China are found in Taiwan – most clearly some of the world class technology companies,” he continued. “Singapore hosts wonderful proxies on South East Asia and Australia remains over-looked by many global investors. We remain overweight these markets and continue to favour the property (landlords rather than developers) and casino sectors.”

Of the trade wars, Sharat Shroff, manager of Matthews Pacific Tiger fund, which is on the Chelsea Core Selection, said: “U.S.–China trade tensions remain unresolved, and the uncertainty is a drag on corporations’ investment plans, particularly in China. This trade tussle creates volatility in the market, as well as buying opportunities among quality companies with attractive growth prospects.” Sharat says that they are excited about the quality of China’s growth, rather than simply the quantity.

“Rising incomes and consumption patterns, along with an expansion of the private sector, create more-sustainable growth opportunities. Elsewhere, we find a lot to be optimistic about India’s future. The recently lowered corporate taxes and improving liquidity should benefit earnings for better-managed companies. Earnings were revised up and could continue to rise as the effects of India’s fiscal and monetary stimulus work their way into consumer’s pockets.

“Risks to India’s economy include any potential shocks to oil prices based on geopolitical conflicts, as India imports most of its energy, and prolonged disruption in the financial system. Looking ahead, we will continue to watch for secular growth trends driven by Asia’s consumers.

As a result of our bottom-up investment process, our strategy currently tilts toward countries less represented in the benchmark. This is where we see the next generation of quality growth companies emerging within Asia. Take the example of Indonesia. As more people enter the country’s middle class, demand for health care is an offshoot of that growth. As incomes rise, people want better health care and a better quality of life. We believe this type of consumer spending is a durable form of growth that can benefit investors with a long-term mindset.”

Growing income opportunities

When it comes to income, the opportunities are also increasing. As Matthews Dobbs, manager of Schroder Asian Income, which is on the Chelsea Selection, said: “The propensity for dividends to surprise in Asia is helped by improving corporate governance and regulatory changes in the region.”

This view is echoed by Jochen Breuer, manager of Fidelity Asian Dividend fund. Jochen said that the dividend growth over the past couple of decades has been excellent, and there is political support for companies to pay high dividends, especially in places like China and Korea. He shared a graph with us that illustrates quite clearly that there is an attractive level of income across the region – making for plentiful opportunities.

Attractive dividend yields across the Asia region

Fidelity, Jeffries, Factset, Refinitiv Datastream, as at 30 November 2019

The managers of Guinness Asian Equity Income – another fund on the Chelsea Selection – concluded: “Most Asian economies have positive real interest rates and so have the room to stimulate economic growth with conventional monetary policy, i.e. by cutting rates. This is in stark contrast to developed economies, many of which have negative real rates and so do not have the room to boost growth with conventional monetary policy. Asia remains an attractive place to invest, underpinned by the ability to support growth with sensible and conventional monetary and fiscal policy.

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The views expressed are those of the individuals and do not constitute financial advice.

Published on 13/01/2020