Should you invest in Asia for income? With a growing dividend culture, it could be a sweet spot for UK investors By Maike How to invest money uk For Thisismoney.
Read this: Should you invest in Asia for income? With bond markets jittery and equity markets in the US, Europe and the UK starting to look pricey, where can investors find sustainable growth and income? While growth in the rest of the world remains sluggish, the region continues to power ahead. Meanwhile, the region’s reform-minded governments are helping to steer these economies away from export-led growth models to more sustainable growth underpinned by domestic demand. But Asia is no longer just about capital growth.
In an income-hungry world, Asian dividends have become a key source of income. Of course, with investors cottoning on to the allure of Asia, stock markets in countries like India and China have raced ahead leading to inevitable questions about rising valuations and bubbles brewing. Here are four key things you need to know about investing for income in Asia. However, Asia boasts a much more diversified pool of dividend payers with around 95 per cent of the companies that make up the MSCI Asia Pacific ex-Japan index, now paying a dividend. Many of these companies’ cash piles have increased significantly since the global financial crisis and a low inclination to increase capital spending means it is highly likely this cash will be returned to shareholders. As Mark Williams, co-manager of the Liontrust Asian Income Fund explains: ‘There is a very clear desire by Asian companies to increase dividend payouts – a reflection of the strong financial position of companies and countries in Asia and an increasing focus on shareholder returns.
155 per cent by the end of 2014. This period includes the savage Asian financial crisis. 92 per cent from income alone and a total return of 241 per cent. In comparison, the total return from the UK equity market over the same period was 84 per cent, of which 65 per cent was income.
With investors cottoning on to the allure of Asia, stock markets in countries like India have raced ahead. Income opportunities in Asia are not only limited to the equity space. Asian corporate bonds boast attractive yields and thanks to sound balance sheets many Asian companies are finding it much easier to borrow. Chinese corporate bond market is now the world’s largest. Hong Kong, Singapore and Korea are more liquid, countries like China, India, Indonesia and Thailand are still developing.
In markets like China a lot of debt is sourced from the dubious shadow banking sector. Most investors will be better off outsourcing to a professional bond fund manager, via an Asian bond fund or more generalist emerging market corporate bond fund, either of which should only make up a very small part of your overall portfolio depending on your appetite for risk. Unsurprisingly, most fund managers in this space tend to prefer Asian corporate bonds with an investment grade tag, as these are better placed to pay back creditors. Every fund manager knows that a dividend payment is never guaranteed – there’s always the risk that a company might cut its dividend if it runs into trouble. However, it’s worth noting that in the Asia Pacific region, a large slice of company dividend payouts come from more developed countries like Australia and Singapore.
Look under the bonnet of any Asian Equity Income Fund and you’re likely to these regions taking up a significant proportion of the portfolio, which should at least in theory, make these funds a less risky play than Asian growth funds which tend to have a higher exposure to developing countries in the region. These companies are well capitalised and have sustained dividends for many years. But as ever the price you pay matters. While Asia’s historic dividend yield has been driven by Australia, still one of the highest yielding markets in the region, not all fund managers are convinced. For example, the Liontrust Asian Income Fund has low exposure to Australia. They are unconvinced of the country’s short-term economic prospects and feel the market is expensive.