Mike Kerley, Fund Manager of Henderson Far East Income, delivers an update on the Trust and why he believes the Chinese economy “is back to expansion” having been through the worst of the COVID-19 storm. Mike also outlines the latest activity within the Trust’s portfolio; explaining why he and the team are happy with the revenue generated from their current holdings and where they expect to find income throughout the year.
Hi I'm Mike Kerley. I'm the manager of Henderson Far East Income and I thought I'd spend a couple of minutes giving you some idea of what our thoughts are in these difficult times, what we're doing in the portfolio and what's happening in the region which could either impact what we own or the potential for dividends going forward.
Without further ado let's start with the virus. I'm not a doctor clearly and I can read the same bits of news we get from the BBC etc., so I'm not going to give you any insight as to when I think the virus could peak out. I think when the numbers peak out in some of the larger economies around the world and especially the US; it’s at that point we can start seeing a light at the end of the tunnel. But clearly, we’re not there yet but what I can talk to you about is what's happening in Asia. Obviously, the virus started out in Wuhan China back at the end of last year and the lockdown which the Chinese embarked upon happened towards the end of January and then eleven to twelve weeks later we started to see a peak in cases and where we are now we're actually seeing very low numbers of new cases. So, the lockdown clearly worked.
More importantly I think China is on the recovery trend. So, we had some PMI numbers out today, showing the economy is back to expansion, in other words a number over 50. It was mid 30s last time to give you some idea of the contraction. The services side is taking a little bit longer to recover but manufacturing is recovering; the other area which is weak is exports. So, what we're seeing at this point in time is China and other parts of Asia, Korea being a prime example, seem to have the virus contained and are actually back on the growing the economy phase rather than the containment phase. So that to a degree has dictated what we're doing in the portfolio.
We've always been more positive on the demand story in Asia than we have been on the global demand story. And as a result, we haven't had much exposure to export orientated stocks; and at this point in time we stick with that. There will come a time when demand will pick up in the West but it's not now; and it's difficult to know when that will be. So, we are seeing some domestic demand recovery in some of the Asian markets as some of these measures reduced over time. And we want to keep the portfolio exposed to those areas.
What are we doing? Well what we do know at this point is that the government support will be, as we've seen, almost endless and infinite which is positive. And we've also seen monetary policy being pretty active, so interest rates which were already low have come down and likely to continue to come down further. So, from our perspective what that means is that ultimately the demand for yield will be very strong. It's not really manifesting itself yet but ultimately, we still have aging populations, record low interest rates and obviously people have been looking in high yield credit markets but there's a bit of a cloud over those at this point in time so sustainable high yield stocks in Asia, we think, will be well supported in this environment and we've been adding to property, property REITs, infrastructure REITs and telecommunications companies at this point in time. We're very careful about which companies we have exposure to in terms of dividends and there's a lot of dividends being cut the world over, just the other day we saw European authorities have told European banks not to pay dividends to shore up capital. We're not seeing anything like that in Asia which is ironic really because everyone talks about the intervention that governments make especially in China into the operations of corporates and the general economy. But actually, we're seeing more state intervention in the West than we are actually seeing in China. But we're seeing dividends rise at this point in time for certain markets and there is something which is unique to Asia; a lot of the companies pay dividends once a year so we're seeing dividends from Hong Kong and China and Taiwan based on financial year 2019 or end of December numbers. Financial year 2019 was a decent year, so a lot of the dividends based on payout ratios, which have been relatively well fixed, are based on last year's numbers. So, we're seeing positive dividend surprises in this environment because they're based on last year. So, some of the weakness we've seen in dividend trends elsewhere is not carrying forward in Asia at this point in time. What you probably would have to ask yourself is what happens next year when the dividends are based on financial year 2020 which is clearly going to be a lot a bleaker year. But for this year we're quite happy about the revenue generation from the companies we own and the potential the companies we could own through the rest of this year.
The other thing that is helping is the weakness of sterling. Most of the Asian currencies, not all, but most have followed the dollar pretty tightly. And as a result, the dollar's been generally quite strong, and Sterling has been quite weak, so we've had a boost in revenue and capital from the weakness of sterling.
Finally, just a little bit on allocation; which are the markets we prefer at this point? China to us is best placed, it is furthest through this event, which is ironic considering that's where it started. But ultimately things are reviving, and the trends are fairly decent. We don't think in the short term that consumption will come back as quickly as manufacturing. But ultimately that the long-term story of increasing disposable income and consumption will prevail in China. But in the short term we've been adding to companies which benefit from the inevitable government stimulus package, which has been alluded to at the weekend and is likely to be announced further as we go through this week and that will be focused on infrastructure spending, property in particular and helping companies regain their position in the manufacturing sector. So, China is now 28% of the portfolio which is up from where it was. That is partly because China outperformed but also because we've been adding new positions there. The areas we've been taking away from is generally banks. The banking sector is cheap, inevitably in China, but falling interest rates is not good for net interest margins and profitability. And you do have to worry, a bit like what's happened in Europe, is we get some kind of state intervention where banks have to increase their support of local industry by extending credit lines or increasing credit lines maybe into industries which are maybe not that strong in the longer term. I'm not sure that's in the best interests of shareholders or in banks themselves. So, at that point I'll leave it there. Thank you for listening and keep yourself safe.