Investing in Asia has historically been purely focused on growth opportunities, usually through a decent exposure to China, given the perception of Asia as a play on global GDP and export growth. But Newton Asian income portfolio manager Zoe Kan thinks this is a fallacy, arguing that better risk/reward characteristics could be had from focusing on income as well as growth in the region.
According to Kan, a focus on income in Asia can better align investors with companies with strong standards of corporate governance and cashflows to be able to pay dividends.
Kan says in the new regime of higher interest rates and inflationary pressures there will likely be more volatility. Coupled with a change in China’s economy and its growth dynamic, she believes investor perspectives on investing in Asia could be changing.
“The way people have benefited from investing in Asia in the past was through traditional growth-only strategies,” says Kan. “We would argue in the next decade or more investors might want to think more carefully about the type of strategy they are invested in.”
Kan notes over recent years China’s internet platform companies have become a large part of the benchmark. However, she adds valuations have been severely impacted due to factors including the country’s uncertain macroeconomic situation and heightened regulatory risk. “We think this illustrates one of the pitfalls of focusing only on growth strategies in the Asia region, where valuations are not grounded by dividends,” she adds.
Kan notes there are many Chinese companies that offer yield in the benchmark. However, these are often state-owned enterprises which the Newton Asian Income team’s investment process avoid.
Beyond China
The Newton Asian Income strategy has had a significant underweight to China for many years due to concerns around governance and what it perceives to be a lack of sustainable growth franchises where competition can erode earnings.
Instead, the portfolio has an overweight position in other areas where Kan argues quality companies can be found. One of these is Singapore where Kan suggests there are companies with good governance, strong balance sheets and decent payout ratios.
“There is a lot of wealth and trade that goes through Singapore from its neighbouring regions,” she adds. “Banks in the region have well-capitalised balance sheets and the ability to sustain dividends at a higher rate for years to come.”
Kan notes another overweight in the portfolio is Taiwan due to the opportunity around its many technology companies. She also says Indonesia has merits. The country was part of the so-called ‘fragile five’ during the Taper Tantrum of 2013 but Kan thinks it emerged from this episode stronger from a current account and fiscal perspective. “We see strong growth coming out of that economy and think this is likely to continue,” she adds.
Total return contribution
Overall, Kan adds the team broadly looks for balance sheet strength, strong business models and companies that have moats that give a competitive advantage. “In other words, quality franchises with a degree of pricing power that maintain profitability and margins and pay dividends at the end of the day.”
She argues that by harnessing the potential of dividends and dividend growth it is possible to compound total returns in a more consistent fashion than by trying to target growth on its own.
“Especially with Asia, we think the capital growth component of a portfolio’s total return is more volatile and less dependable than the income component,” she concludes.
