The new US administration has sucked oxygen from other important stories around the world. While the world was focused on Trump’s tariffs, China quietly announced a $41bn package to boost consumer spending. It was a sign that the government would do ‘whatever it takes’ to drive growth. It may suggest a change of direction for the region and for the Asian Equity Income sector.
The original argument in favour of Asian equity income was that it was a good way to generate dividend income away from the stodgy old economy sectors such as banks, healthcare or commodities that dominated UK equity income funds. This has held true, with Asian equity income funds offering access to sectors such as technology and fast-growing consumer companies that don’t tend to feature in other equity income funds.
That said, the sector has produced relatively unexciting returns for shareholders. Over three years, the Asia Pacific Equity Income sector is behind the global equity income sector, where funds have returned an average of 31.1%, and even the much-derided UK Equity income, where the average is 18.5%. The average fund in the Asia sector is up just 14.9%[1], though the weak performance of Henderson Far East Income has dragged down the wider sector.
Asian income funds have tended to have relatively low weights to China, which has helped performance relative to other Asian funds in recent years given the weakness of Chinese markets. However, it has also held back performance in the shorter-term as Chinese markets have recovered.
Sector evolution
There are signs that this may be changing as China enters the fray as a dividend market. Eric Chan, manager of the abrdn Asian Income Fund, says that Chinese companies have had a rethink on how they return capital to shareholders. This has seen companies such as Tencent and Alibaba start paying dividends. The Aberdeen trust has been upping its China weighting over the last 12 months as more opportunities have emerged.
Emily Whiting, investment specialist, emerging market & Asia Pacific equities at JP Morgan Asset Management, agrees: “There has been a massive shift in China. Corporates have recognised that with a slowing economic backdrop, they need to boost their total return. Rather than using cash to acquire new businesses, they have decided to pay some of that back. Five years ago, Alibaba and Tencent were absolute growth darlings. It was all about acquiring other businesses. Now they recognise it makes more sense to pay out dividends.” This means Asian equity income funds may participate in China’s recovery.
The Asian equity income story has evolved in other ways. Chan says Asian companies have improved their governance significantly over the past decade, emulating the example set by Japan. That means more companies paying dividends and a broader opportunity set for trusts in the region.
Ian Hargreaves, co-manager of Invesco Asia Dragon Trust, says Korea’s Value Up initiative is noteworthy. This aims to support the appeal of local equities through reforms to corporate governance and enhanced distributions to shareholders. “As part of this programme, the Korean Stock Exchange recently launched the Korea Value-Up Index consisting of companies that satisfy several quantitative criteria related to profitability, shareholder return (dividend payout/treasury stock cancellation) and high price to book value and return on equity relative to industry, among others.” Most of Hargreaves’ Korean holdings fall within the index.
There are other reasons that Asian markets may have appeal. They are notably less indebted, says Chan: “Today, corporate balance sheets in Asia look very secure and have much less debt than their Western peers. This is partly scarring from the Asian financial crisis, and a result of the depth and liquidity of debt markets, but the average Asian company has more cash and dividends are well-covered.”
A shift in market leadership
The caprices of the new US administration may have finally started to push investors away from the US technology giants, and in this environment, Asian markets may start to command more attention. Hargreaves points out that Asian company earnings trade at a discount compared to their US equivalents: “The earnings growth outlook for these companies is strong, with Asian markets projected to grow earnings per share by around 13% annually over the next three years – higher than expected growth in the US market.”
Asian markets are tapped into a number of the growth stories that have drawn so much attention in the US. They have plenty of beneficiaries of the growth in AI, for example. Whiting says: “In terms of where we are finding opportunities, technology would be right up there. Taiwan leads on semiconductors and Korea leads on memory. Both are really good markets with superbly run businesses.”
The growth in the Asian consumer is also a significant chunk of both the JP Morgan Asian Growth & Income fund and JP Morgan Global Emerging Markets Income fund (which has around three-quarters of its portfolio in Asia): “There are 4.5bn people in Asia, who live, work and consume. They have to be at the heart of what we’re looking to do,” says Whiting. The Invesco portfolio also has exposure there, Hargreaves says, via a combination of internet companies, consumer-related businesses (including e-commerce) and financials stocks.
He adds: “We see opportunities across tech and manufacturing, even if we are now cautiously underweight Taiwan on valuation grounds. We also have overweight exposure to Indonesia, where we see an attractive combination of growth prospects and undemanding valuations.” Most Asian income funds are underweight India, where there are relatively few dividend opportunities.
Hargreaves says the true risk may lie not in the volatility of these markets, but in the opportunity cost of staying out of them. Whiting adds: “Some of the shake out seen in the US market right now is reminding people that US exceptionalism isn’t the only game in town. It’s a good reminder that diversification is important and markets can go up as well as down. And Asia has been in the shadows. Looking at valuations, at the potential of some of these businesses, their potential customer base, it’s huge.”
Inevitably, Asia cannot be immune from global turbulence and the impact of tariffs, but the region has at least seen this playbook before and prepared. Heightened volatility is likely, but its strengths may be better appreciated by investors from here.
[1] https://www.trustnet.com/fund/sectors/performance?universe=T
