Investors should adopt a total return approach in the current environment according to Matthews Asia's Yu Zhang
With Asia being home to many of the world's fastest growing economies, it is no surprise that many investors adopt a growth approach to the region. However, despite the dramatic increases in the standards of living in Asia over the past decade or more, the headline equity market has not always met return expectations.
One of the reasons for this is that companies that capitalize on Asia's ongoing growth today are different to those that benefited in the past and benchmarks often fail to keep up with the pace of change in Asia. In addition, we would argue that unless you are aligned with a business that will share this growth with you, you will not see any of the end benefits. That's why we believe a dividend approach to Asia does not have to be at the expense of growth.
Indeed if you look at the underlying growth of the dividend pool in Asia, it has grown four or five percentage points ahead of Europe and the U.S. over the past decade (see Figure 1). Not only does this explain why dividend investing in Asia has proved popular in recent years, it also goes some way to explain why it should remain the case even when interest rates do rise globally.
Asia is an extraordinarily diverse region. It houses frontier, emerging and developed markets, and there are dividend-paying companies throughout the region. Today the region's equity markets have grown to represent nearly 40% of global stock market capitalization, while dividend payments have grown to about US$286bn, which is approaching the size of the dividend pool in developed Western markets (see Figure 1).
The culture of paying dividends is also improving in the region, with countries like Japan and South Korea just beginning to enter the dividend growth area. It is due to this combination of government regulation and investor activism that is increasingly offering opportunities to dividend investors.
In particular the governments of Japan and South Korea have been encouraging companies to better utilize the cash sitting on their balance sheets, which has resulted in a shifting attitude by corporates towards shareholder distributions.
The broadening of capital markets in countries like China, and improved liquidity, has also assisted the dramatic increase in the number of Asian companies paying attrac¬tive and growing income. In China, aggregate dividend payments increased from just US$8 billion in 1998 to around US$111 billion in 2016.
We think investors that do not venture beyond established hunting grounds, such as Australia, miss out on opportunities not only in markets such as Indonesia, Vietnam and China, but also within the more developed countries like Japan and South Korea.
In addition, we believe it is important to focus on the sustainability of the dividend stream. Many Asian equity income portfolios are built with a lot of emphasis on yield, containing stocks which can have challenging underlying businesses. In our long-term total return approach, we use dividends as an indicator of core earnings growth and strength of the company.
In an uncertain environment where rates are likely to rise, we think investors should focus on total return by investing in companies that offer attractive dividends relative to their share price and can demonstrate the ability to grow their underlying dividends in a sustainable manner. As these companies generate sufficient cash flow to fund dividend payments and allocate capital prudently, they tend to have stronger corporate governance than their peers, and often deliver attractive capital appreciation as well as income. In addition, we think investors in search of yield should look to Asia credit to sustain and diversify their income stream and generate attractive risk-adjusted returns.
To learn more taking a total return approach to Asia, visit global.matthewsasia.com/income
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