Income Opportunities in Asia

Opportunities abound across Asia for income seekers, with strong balance sheets and few dividend cuts to be found 

Annalisa Esposito 25 June, 2020 | 9:17AM
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Singapore

Investors often tend to think of Asia as a purely growth driven part of the world, but may be missing some good income opportunities as a result. Indeed, dividends paid by Asia-Pacific companies rose 0.4% to a record £234.8 billion in the year to end of April, according to Henderson Far East Income's annual dividend index. 

Yoojeong Oh, co-manager of the four-star rated Aberdeen Asian Income Fund (AAIF), says dividends play a key role in Asian markets. Crucially, corporate balance sheets there are very strong - more so than in Europe and the US - meaning the pay outs are reliable. “Asia went through a big financial crisis in the 90s and companies have since tried to strengthen their balance sheets,” she explains. “Strong balance sheets give us a comfortable dividend outlook for companies in Asia.”

However, Asian businesses have not been immune to impact of the coronavirus outbreak on sales and productivity, and many companies have had to cut their dividends this year. For funds which pay dividends quarterly, the second quarter of the year is going to be tougher.

As an investment trust manager, Oh is able to keep money in reserve in order to be able to pay dividends to investors  in leaner years. Reluctant to break the trust's record of raising its dividend every year for the past decade, she admits this is likely to be the case in 2020. 

Developed Markets Opportunities

But Jason Pidcock, manager of the four-star rated Jupiter Asian Income fund, points out that Asian dividend cuts have not been so severe or widespread as those in the UK. While payouts in Asia this year are likely tp be down 20%, it is estimated that dividends among UK companies could halve. Pidcock adds: "While a number of the stocks we own a number have cut their dividend, a handful has instead increased their pay out.” 

He currently prefers developed markets such as Singapore and Australia, and has recently bought into drinks companies including Australian wine producer Treasury Wine Estate (TWE) and Coca Cola Amatil (CCL), which has franchised soft drinks brands across Australia, Indonesia and New Zealand.

Meanwhile, Oh has topped up her holding in New Zealand airport company Auckland International Airport (AIA). “An airport is very different from an airline operator,” she says. “AIA’s price has already recovered substantially since the sell-off; the company has a monopoly and will benefit greatly as travel picks up again.”

She has also invested in energy infrastructure business APA Group (APA), which was on her watchlist for years but was too expensive. “It finally hit our target price and we have enjoyed the stock recovering since then,” she says. “We expect to collect good dividends.”

Emerging Markets for Income

But Pidcock has also taken advantage of the March sell-off to buy into emerging markets, where he had previously been underweight. He bought beer and spirits business Thai Beverage (Y92), topped up a holding in Chinese diaper-maker Hengan International (HGNC) and added to Indian tobacco giant ITC (ITC).

Of Hengan International he says: “It is benefitting from people taking more care of their personal hygiene in the current environment as well as from lower raw material prices." ITC, meanwhile, offers one of the highest dividend yields among all Indian consumer stocks.

Meanwhile, while banks in Australia have been forced to but dividends, other financial companies like insurance companies and stock exchanges have hold up quite well. Indeed a few weeks ago, Pidcock bought into  the Hong Kong stock exchange (00388). “They have good cash balance and their business is doing very well. We are confident about their dividends,” he says.

Oh, instead, likes Asian banks because “unlike UK banks, they have solid capital positions”. While British banks have been told by the regulator to cancel dividends, none of the Asian financials she owns have yet suspended their pay out. and none of her bank holdings have suspended dividends to date.

Elsewhere, she likes Hong Kong convenience store operator Convenience Retail Asia (00831). “It’s a mid-cap company with excellent profits. It changed its store offering to face masks and hand sanitisers, and paid a special cash dividend to shareholders. It yields 12%.”

While a second outbreak of the coronavirus in Beijing may have given some investors pause for thought over investing in the region, Pidcock is confident that economic activity is picking up and government stimulus will continue. He adds: “We actually feel very optimistic. We should reach peak dividend growth again by 2022. It won’t be a straight line, there will be down weeks, but the trend is for equities to go much higher from here and Asia will be at the forefront of that.”

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

Annalisa Esposito  is a data journalist for Morningstar.co.uk