Henderson Far East Income results reflect the market’s love for growth

Over Henderson Far East Income’s (HFEL) annual results period to 31 August 2020, it delivered total NAV and share price returns of -9.9% and -7.8%. These returns compare with a -7.7% result by the MSCI AC Asia Pacific ex Japan high dividend yield index. Despite low interest rates, high yield strategies underperformed, making the backdrop for the fund’s yield and value strategy tougher. By comparison, the FTSE all-world Asia Pacific ex Japan index returned 7.9% over the same period.

Like in the US, the biggest beneficiaries of the market moves were the technology stocks where pandemic lockdowns have brought forward the demand for online services and some of the hardware that supports it.

‘Dividends in Asia Pacific have been more resilient than elsewhere’

At the year-end, financials and telecommunications were the fund’s two largest sector exposures, at 21.3% and 17.1% of the fund. China was the largest country allocation, at 25%, following by Taiwan and Australia, at 18.2% and 16.8%.

The following table displays HFEL’s top 10 holdings, as at the financial year-end:

HFEL’s co-managers, Mike Kerley and Sat Duhra, said the following in their review: “Like most other regions around the world Asian central banks and governments have cut interest rates and increased budgets to offset the impact of the downturn. With the exception of Australia and Singapore whose fiscal responses to the pandemic have exceeded 10% of GDP, the rest of the region has been more restrained. China, in particular, is only projected to spend around 4.5% of GDP on measures to shore up manufacturing and protect jobs, reluctant to repeat the mistakes made after the global financial crisis of 2008 where the excess spend led to over-capacity, excess inventory and a significant accumulation of debt. The targeted measures appear to be working with industrial profits rising 20% year-on-year in September and retail sales turning positive for the first time since the start of the pandemic. There have been encouraging signs elsewhere with Taiwan and Korea showing improving trends driven by exports and manufacturing while the buoyant market for commodities and iron ore, in particular, has been a boost for Australia. The signs are less encouraging in south Asia with Thailand still reeling from the lack of tourist arrivals and India and Indonesia still struggling to contain the spread of the virus. The exception in the south is Vietnam where the number of virus cases has been contained at very low levels and the economy is growing almost unhindered, benefiting from the trend of companies diversifying manufacturing facilities away from China.

Overall the Asia Pacific ex Japan region is expected to see a modest decline in 2020 GDP, with north Asia proving more resilient than ASEAN, India and Australasia. Corporate earnings are expected to decline by a similar magnitude with growth in the technology, health care and consumer staples sectors offset by weakness in the energy, travel and tourism and consumer discretionary sectors. From a valuation point of view, the significant rise in prices and marginally negative earnings has resulted in Asia Pacific ex Japan trading at 15.5x forward earnings which is above its long-term average. This looks attractive compared to the valuations of other global equity markets, which have seen similar or higher levels of price increase, but with far greater declines in earnings.

The best performing market over the period was China, driven by strong returns from Tencent, Alibaba and other internet and e-commerce related names. Taiwan was a significant outperformer as the technology sector was viewed as a beneficiary of the demand for work from home computer products while also gaining market share from mainland China in products subject to US restrictions. Korea managed a positive return, albeit small. The underperformers were in south Asia, with Thailand propping up the list as the restrictions on international travel severely impacted the tourism sector which accounts for around 20% of GDP. The Philippines, Indonesia and Singapore posted significant declines as south Asia took the brunt of investor selling but without the bounce-back catalyst of an investable new economy sector. At the sector level performance in technology, consumer services (which includes e-commerce) and health care increased over 20% while telecommunications, utilities, financials and energy posted significant declines.

Dividends in Asia Pacific have been more resilient than elsewhere. There have been some notable dividend cuts and omissions from HSBC, as well as Australian and Singapore banks and companies exposed to the energy and travel-related sectors, but on the whole, dividends have been paid as expected. This is partly due to the fact that some markets (China, Taiwan and Hong Kong) paid dividends based on 2019 earnings, but also reflects the high levels of cash flow generation and low levels of debt that Asian companies have. With China and Taiwan expected to have positive earnings growth in 2020, we do not expect dividends to be impacted next year when distributions are made on this year’s earnings.”

‘Asia’s income story that shines like a beacon of stability compared to other regions’

The co-managers added: “We remain positive on the outlook for Asia in the years ahead but expect volatility in the short term as the world digests the virus impact and potentially navigates a ‘second wave’, while the US election and relations between the US and China remain events that are difficult to predict. Although global equity markets are currently feasting on the liquidity provided by central government support, this can’t last forever and eventually, the stimulus will have to be withdrawn. Asia is well-positioned to weather these impending storms with an income story that shines like a beacon of stability compared to other regions.”

HFEL: Henderson Far East Income results reflect the market’s love for growth

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