Mark Williams

Which countries offer Asia’s best income prospects?

Mark Williams

In my last blog I suggested that Asia could offer some shelter from the brutal dividend cuts that are being seen in developed markets globally.

In order to benefit from this potential income insulation, it is not a straight-forward case of simply investing in the highest-yielding markets within Asia. While we think Asian earnings and dividends will show some overall resilience to Covid-19 when compared with key developed economies, there will still be varying fortunes within the region.

For example, China is one of the lower-yielding parts of the region – as shown by the 2.0% yield forecast by JP Morgan (see chart below). But this country, alongside the higher-yielding Hong Kong market, is the largest source of income for the Liontrust Asia Income Fund. Around half of the Fund’s income comes from China and Hong Kong, compared with around 35% for the MSCI Asia Pacific ex-Japan Index. This is because we look to capture the region’s growth potential rather than yield alone.

2020 dividend yield forecasts

Within China there are plenty of ways to capture what we see as the sweet spot for Asian income investing: intermediate dividends with long-term growth and attractive valuations. We are invested predominantly in domestically oriented businesses with little exposure to companies exporting to developed world consumers. Examples include Weichai Power, China’s top diesel engine maker, and Dali Foods, a food and beverage company with leading positions in China in categories such as baked goods, potato chips, beverages and energy drinks.

We also have significant exposure to companies in China that will benefit from government stimulus, whether it be cement production, infrastructure projects aids to the housing market or environmental projects. These are all areas that we believe will recover swiftly as the economy begins to function, and we have added to positions as opportunities arose during the crisis. We bought Huaxin Cement, which – as its name suggests –forms part of a Chinese cement industry offering a broad play on infrastructure investment in China. It is based in Wuhan and its operations were hit heavily as lockdowns were enforced. However, we thought its valuation looked compelling (at a price/earnings ratio of around 7x) given that cement production was more likely to have been postponed rather than cancelled. We also added property developer Cifi to the Fund, which stands to benefit from accelerating government stimulus in Tier 1 and Tier 2 Chinese cities.

Perhaps a bigger difference between where we find income for the Fund and where the Asia Pacific region’s dividends are generated, is at the other end of the scale. While lower-yielding China is one of our largest Fund exposures, we have only a modest position in Australia – despite this being the highest-yielding market in the region at 4.5%. With around 7% of the total, Australia sits behind China, Hong Kong Taiwan and Thailand in terms of its income contribution to the Fund. But it accounts for almost a quarter of the region’s dividends, as measured by the MSCI index.

Current 2020 dividend forecasts

We have recently increased the Fund’s Australian exposure to around 8% after buying the mining company BHP – a clear beneficiary of China’s economic resumption – but it remains low, particularly in a context of other Asian income funds.

This low Australian weighting goes back to our underlying ethos for the Fund: we invest in companies that have good prospects for growth in earnings and dividends, rather than those providing high income without growth. We think Australia’s economic recovery is likely to be slowed by the same constraints that affect Western economies – particularly a hard-hit consumer. Until we change our minds on the relative strength of Australia’s economic recovery, we are likely to remain underweight.

After China and Hong Kong, the next biggest contributor for dividends within the Fund is Taiwan. This market ranks as one of the higher yielding within Asia, but we don’t invest in the country’s mature, low-growth businesses. Instead – in contrast to our Chinese exposure – we own technology companies that are exporters, often to Western economies.

These Taiwanese companies are paying out more in dividends as the past decade has marked a maturing of their businesses, often with less competition since the financial crisis leading to more sensible investment decisions. This, in turn, has generated huge free cashflows which are now being used to reward investors. Last year, Taiwanese companies benefited from having facilities not based in China as trade wars escalated; this year, many are seeing a huge increase in demand as the world adapts to Covid-19. As companies and individuals need to do more remotely, some of our investments are seeing sales equivalent to the pre-Christmas rush coming in the usually quiet first half of the year. Taiwanese holdings to benefit from this sales boost include Taiwan Semiconductor Manufacturing and Lotes, the computer component manufacturer. While this is a short-term phenomenon, we think that recent changes will lead to higher longer-term demand than previously expected.

The Asian income opportunity remains compelling and now looks even more attractive in the context of major dividend cuts being experienced elsewhere in the world. But – as has always been the case – investors need to be selective as the region contains a variety of countries, in very different stages of development, some of which will recover from Covid-19 better than others.

 

Liontrust Insights


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Past performance is not a guide to future performance. Do remember that the value of an investment and the income generated from them can fall as well as rise and is not guaranteed, therefore, you may not get back the amount originally invested and potentially risk total loss of capital. Investment in Funds managed by the Asia team involves foreign currencies and may be subject to fluctuations in value due to movements in exchange rates. The Fund’s expenses are charged to capital. This has the effect of increasing dividends while constraining capital appreciation. 

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Wednesday, June 24, 2020, 1:11 PM