Seeking yield – The long-term Asian dividend story

In the current climate many investors are expecting an interest rate rise announcement from the US Federal Reserve (Fed), which many believe will hurt the appeal of dividend-paying stocks. However, this assumption ignores the positive longer-term dividend story in another part of the world: Asia. 

Income attraction
I believe the long-term case for investing in Asian dividend stocks remains strong. First, dividend returns in Asia are highly-correlated to economic growth and account for over three-fifths of long-run equity returns. For an active manager, the case for income in Asia is also supported by how the region compares favourably in its share of higher yielding (+4%) stocks in relation to its global market capitalisation weighting (see below).

 

Tenet

Corporate governance and levels of payout ratios in Asian countries also yields a positive correlation as companies with strong governance (in places such as Hong Kong and Singapore) look to create long-term shareholder value. Furthermore, dividend yields on equities remain at around their 10 year pre-financial crisis averages in spite of their potential for dividend growth.

The crucial factor to watch will be how fast rates rise from there. In this respect, I think rates will rise gradually and this should make the transition to a normalisation of rates more manageable for income-yielding stocks.

Asian context
Although Asian stockmarkets have lagged global markets’ returns, this underperformance has come despite Asian companies having a broadly similar earnings profile to their global peers. While valuations in other markets have seen a rerating upwards, Asian markets have not.

The China story
In part, sentiment remains relatively negative owing to the slowdown being seen in China. Here, for producers, deflationary forces remain entrenched and are exacerbated by the elevated level of the currency. Domestic corporate earnings remain under pressure and we are sceptical whether financial engineering will feed through to sustainable growth.

Falling commodity prices
The current global situation – where oil is hovering around $50 a barrel – also favours much of Asia, which is a large net oil importer. Falling commodity prices should benefit the region both from a macro perspective and a micro one with falling input costs for companies and improved spending power for the consumer.

In contrast to the ‘taper tantrum’ of 2013, the region’s economies are in better shape to weather the volatility given the general improvement in their external accounts. Current account deficits have fallen in countries such as India and Indonesia and most of the debt held by companies are denominated in local currencies; a far cry from the days of the 1997 Asian Financial Crisis. This time, governments and policymakers are in a better position to deal with any fluctuations in exchange rates and spending and to an extent expectations of a rate hike are more widespread now than then were in 2013 when talk of ‘tapering’ shocked the market.

On the global front export demand from Asia has been subdued versus previous cycles but any pick-up in growth globally will support earnings for Asian companies as the region remains the world’s factory. In aggregate, valuations of Asian markets continue to trail those of the rest of the world reflecting the low expectations for growth in the region versus elsewhere.

Long-term income
Ultimately, investors must remember that companies that create real shareholder value will normally have a supportive shareholder returns policy, often manifesting itself via a favourable dividend policy. In Asia, the overall long term picture for investing in the region remains as strong as ever.

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