Jonathan Reoch
Head of Asian Equities

Asian markets are often perceived as being driven mainly by growth considerations. However, as investors wrestle with the distorting impacts of quantitative easing and as the larger Asian economies enter a more mature phase it is worth considering the often hidden potential of income strategies within Asian markets as a means to identify investment opportunities.

Some income-focused strategies have been among the most consistent performers in emerging markets and Asia over the past decade. We note that value strategies, including those of dividend yield and cash flow yield, have had more consistency and reward for risk than those based around chasing high growth or high returns in Asia.

Tracking the importance of the dividend component to total return shows that, its contribution has been steadily increasing through the past decade, such that it now rivals earnings as the biggest driver of the total return, as shown below.

Demanding a certain level of income puts something of a cap on acceptable valuations, a key consideration given the prior success of value strategies. It also guards against chasing expensive growth stories and overpaying for them.

At AMP Capital we employ a bottom up investment process with a mix of qualitative and quantitative factors. A key part of the quantitative side is a robust quant value model that includes factors such as forecast dividend yield and four year historical dividend growth, as a way of explicitly ranking companies and better sharpening the opportunity set.

Furthermore, it also makes company management watch the cash. Firms that had a record of paying a decent share of their earnings as steady, sustained dividends tend to be more prudent and less inclined to squander shareholder funds.

Developed markets are commonly perceived to have more fertile opportunities for income investing given higher returning and more mature companies. However, as shown below, dividend growth has actually been higher in many emerging markets over the past decade.

 

While there is a low base effect at play here to a certain extent, income strategies or dividend yields have proven to have greater sustainability in emerging markets than developed markets.

 

Source: Factset Alpha Tester, CLSA Asia Pacific as at October 2013. MSCI-weighted US dollar total return with monthly rebalancing. Past performance is not an indicator of future performance.

CLSA have done some interesting work which shows the performance differential of the highest quintile dividend yield stocks (versus lowest quintile and market) has been significantly greater in emerging markets than developed markets over the past 10 years, with a wider divergence in emerging markets over the past five years.

 

 

 

One of the key differentiating factors behind high-dividend-yield stocks performing significantly better in emerging markets since the global financial crisis than developed markets during 2007-10, was that they were lower-quality stocks, particularly from Europe, with unsustainable dividends such as the financials.

But emerging-market stocks have outperformed even during the significant 2009 upmarket.

However, the sustainability of higher dividend payouts, particularly coming out of high growth periods, needs to be considered.

Within Asia, income investing has had good results across most of the major markets with good performance differentials across 5 and 10 years. This would surprise some in markets such as China where earnings or revenue growth is often seen as the key driver.

High GDP growth has not necessarily translated into good stock market performance, so investors have preferred those companies that have grown earnings and dividends sustainably.

The family nature of some Asian companies (distributing rewards), and the funding needs of governments via dividends from State Owned Entities (SOEs) have also been powerful forces behind increasing dividend streams.

That said, investors need to be aware that high-yield strategies can face headwinds such as expensive valuations, rising bond yields and increased presence of value traps in a low-growth environment. ASEAN markets in particular had an early warning signal of these factors on the first tapering fears in May this year. So such strategies need to be carefully considered and executed.

Accordingly, we believe, considering income investing within the context of a wider value strategy can produce sustainable outperformance in Asian markets.

 

^ Top




 

Important Notice to all Investors: This document has been prepared by AMP Capital Investors Limited (ABN 59 001 777 591,AFSL 232497) (“AMP Capital”) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) (“AMPCFM”) for providing general information about the product referred to in this document (“Fund”) and is qualified in its entirety by any product disclosure statement, information memorandum, private placement memorandum or other disclosure or offer document and legal documentation that may be subsequently available. This document is not intended to be and does not constitute a recommendation, offer, solicitation or invitation to subscribe regarding the Fund, and is not intended for distribution or use, in any jurisdiction where it would be contrary to applicable laws, regulations or directives. Prospective investors should make their own inquiries and consult their own professional advisers as to the applicable laws, regulations and directives (including any requisite governmental or other consents and any other prescribed formalities) in any particular jurisdiction (including, in which the person comes into possession of this document) and the consequences arising from a contravention of them at any relevant time. Any failure to comply with such restrictions may constitute a violation of applicable securities law. While every care has been taken in preparing this document, except as required by law, none of AMP Capital or AMPCFM or their associates makes any representation or warranty as to the accuracy or completeness of any statement, including, without limitation, any forecasts, or takes any responsibility for any loss or damage suffered as a result of any omission, inadequacy or inaccuracy.

This document does not purport to be complete, does not necessarily contain all information which a prospective investor would consider material, and has been prepared without taking account of any particular person’s objectives, financial situation or needs. Accordingly, the information in this document should not form the basis of any investment decision. A person should, before making any investment decision, consider the appropriateness of the information, and seek professional advice, having regard to the person’s objectives, financial situation and needs. Past performance is not a reliable indicator of future performance and there can be no assurance that the Fund will achieve its objective or its target returns or that investors will receive a return from their capital. This document is provided to you strictly on a confidential basis and the information contained in it must be kept strictly confidential (with the exception of providing it to your professional advisors who are also contractually and/or professionally bound to keep it confidential) and may not be reproduced or redistributed (in whole or in part) or otherwise made available to any other person in any format without the express written consent of AMP Capital or AMPCFM. All information contained in this document, unless otherwise specified, is current at the date of publication and will not be updated or otherwise revised to reflect information that subsequently becomes available, or circumstances existing or changes occurring after that date. By accepting a copy of this document, you agree to be bound by the limitations, terms and conditions set out in this notice.