In this video Mike Kerley, Asian income equities portfolio manager, provides a review of Asia Pacific ex Japan markets, discusses favoured and avoided markets and the reasons why he expects the region’s dividends to prove resilient.
This video was recorded on 6 July 2020.
- Company fundamentals are often overlooked in periods of uncertainty, COVID has meant that stock selection and country allocation are even more imperative
- Mike believes Asian dividends can remain resilient in comparison to other regions as consensus earnings are only expected to fall by 1% this year, and most portfolio companies have continued to pay dividends so far.
Hi there. I just thought I'd spend a few minutes just talking you through how we see the world at the moment, what that means for Asia in particular. Well these are difficult markets. I think it's fair to say it's very difficult, here as a bottom-up stock picker, looking at the fundamentals of stocks and seeing a quite bleak outlook for a lot of areas, yet we continue to see markets move higher. And what was obviously happening out there is that investors are focusing far more on monetary and fiscal policy than they are on fundamentals, which means that some of the valuations out there are heated to say the least. If you think about the US, it’s 10 percent off its all-time highs, yet it's expected to have 20, just over a 20 percent earnings decline this year. Everyone's looking through that valley and into the possible recovery next year. The recovery forecast for the US is to be almost 30 percent earnings growth next year. So almost ignoring what's happening in the short term and just looking to that recovery. The problem I have with that of course is that no one quite knows how deep and how wide this valley is, yet the markets are saying well this is a V-shaped recovery. The governments and central banks will do whatever it takes. And the markets are reacting accordingly. Again, as I say, it's a very difficult environment for a bottom-up stock picker especially one that’s focused on income. From an Asian perspective, we’re getting the same kind of responses at the market level. When markets are down and people are worried about growth, then the growth stocks tend to outperform. When there are some seeds of recovery then we get value outperforming, although briefly as we've seen in a [the last] couple of weeks. And within that kind of sits income, where we know that dividend yield will be popular in the months and years ahead because interest rates are going to stay low for a long time. But in this ‘flip-flop’ environment of growth or no growth they tend to get ignored even though the earnings streams and the valuations for these areas are much more attractive compared to many of the others. We're pretty optimistic on what's happened in Asia. Responses that governments and central banks have made, if anything it's not been as significant as we've seen in the West as a percent of GDP [gross domestic product]. But to be honest it didn’t need to be. Asia went into this downturn in a far healthier state than most other developed markets. And will probably come out, well is certainly going to come out quicker and probably healthier on the other side. But in this environment of growth/no growth with governments supporting excess liquidity, again maybe fundamentals, they have been somewhat ignored.
Current portfolio positioning
Within the portfolios we haven't been doing too much, we focus really on what we know rather than trying to guess what we don't know. And what we do know is that certain areas and certain companies will be generating decent amounts of cash flow this year almost irrespective of COVID. So the telecom sector, for example, is forecast to see a less than 1 percent decline in earnings this year and 10 percent growth next year. That's the kind of steady even keel we'd like in the companies we own. We like China as a market. Again, first in, first out and we think the responses the government has made there have been pretty supportive although it's not really being borne out yet in share price performance, but we're quite positive on that. We think infrastructure spending across the region in China in particular will be positive, we like materials for that reason as well. Markets we don't like ̶ we continue to avoid India. Not only because of COVID. To be honest, the COVID response has been pretty poor to say the least and it looks like infections there still haven't peaked. But India was in trouble before this and will be in trouble for when it comes out the other side as well. Valuations there were really extreme and clearly there's no income so that's not a market we like. Australia is an interesting one. Australia looks more like the UK and Europe in terms of dividend payout maturity compared to the rest of Asia, and there's been quite a lot of dividend cuts there, over 70 percent of the market has cut dividends. So you have to be very stock specific.
Asia Pacific ex Japan dividend outlook
We have had most of our companies continue to pay dividends as we expected. We haven’t seen the dividend growth we'd like, but that's not a huge surprise at this point. I mean, income in general across the region has been pretty resilient, partly because some of the companies are paying dividends based on FY19 [financial year 2019] earnings, Hong Kong and China and Taiwan in particular. So that's not really seen some of the COVID impact, we may see a bit of that next year. But to be honest considering earnings in Asia are only expected to fall 1 percent this year we're not expecting a huge drop-off in dividends next year either. As we saw in the Asian Dividend Index*, which Janus Henderson Investors published recently, in the best-case scenario the forecast is only a 9 percent decline in dividends this year, and I would say for our portfolio I would expect it to be better than that. You think about the consensus is expecting a 1 percent decline in earnings for the whole of Asia-Pacific this year, a 9 percent decline in dividends to me is probably a little aggressive. But if you’re specific and look for certain areas then there's a lot of dividend resilience across the region.
*Henderson Far East Income Asia Dividend Index, year to 30 April 2020. Forecast only and is not guaranteed.
Monetary policy: the policies of a central bank aimed at influencing the level of inflation and growth in an economy. It includes controlling interest rates and the supply of money.
Fiscal policy: government policy relating to setting tax rates and spending levels aiming to influence economic conditions, including aggregate demand for goods and services, employment, inflation, and economic growth.