Jason Pidcock, manager of the Newton Asian Income Fund, looks at the outlook for equity income investing in the Asia-Pacific ex Japan region.
"Some investors question equity income investing in Asia, pointing to value traps where capital gains are muted and yields are the biggest contributor to returns. However, we don't see this as being the case. Across the region, fundamentals continue to support companies' ability to pay dividends as well as offering growth, while companies' willingness to increase pay-out ratios is increasing as more and more realise the benefits of paying a dividend," says Pidcock. "The reason for Asia's current dividend ‘sweetspot' is that the companies which dramatically cut their capital expenditure during the global financial crisis have kept this expenditure low. We are reasonably confident about the sustainability of these dividends, as well as the prospects for dividend growth. Strong earnings growth alongside stable pay-out ratios means that continued dividend growth can be achieved," Pidcock adds.
Inflationary pressures
One of the more common questions at the moment is whether inflation and its consequences will derail Asian growth. Pidcock continues, "We see inflation as a global phenomenon which has evolved ever since the world's reserve currency, the US dollar, came off the gold standard - the 40th anniversary of which will take place this August. Asian companies are relatively well placed to cope with inflation, thanks to the strong balance sheets and low gearing levels that also make dividend payments possible. Countries across the region have been tightening monetary conditions to fight inflation, whether it is through currency appreciation, increased reserve ratios or with more traditional means such as interest rate hikes.
"Furthermore," he adds, "in an inflationary environment, companies are arguably more likely to return cash to shareholders as the value of holding cash is eroded by higher prices. Asia ex-Japan companies are more likely to return this cash in the form of dividends rather than share buybacks. Meanwhile, there are companies which provide a good inflation hedge in this environment; for example, the Newton Asian Income Fund has a position in Parkway Life*, a real estate investment trust which invests in income-producing real estate assets such as hospitals in Singapore. The company enjoys an inflation-pegged rental formula, helping to pass on costs and grow the distributions per unit at a real rate," says Pidcock.
"Another concern surrounds the impact of Japan's natural disasters on the supply chain for Asian companies, particularly within the technology sector. Globally, this is a relatively low-yielding sector but within Asia, Taiwanese companies buck the trend," he explains. "Although the total impact of Japan's natural disasters on Asian companies cannot be easily quantified, and is still unfolding, at first sight it seems to have been relatively muted. For example, companies reporting first-quarter earnings in Taiwan generally gave relatively good guidance, far from the initial expectations of meaningful disruption. Meanwhile, the outlook for dividend payments in Taiwan remains positive as the regulatory environment continues to be supportive, and a recent resolution to increase corporate income tax on retained earnings to 15%, from 10%, is likely to fuel higher cash dividends.
"More broadly, the outlook is bright for dividends across Asia and attractive total returns can be achieved for investors seeking both income and growth. Some may worry that high dividend-yielding stocks have no growth and where yields make up the majority of returns. However, in our experience, there are plenty of quality companies across the region offering growth as well," concludes Pidcock, "and we expect these to continue expanding in number."
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