A global markets summary.
The global macro environment is becoming quite complicated at this point. What we've seen is a pickup in global volatility and there's a number of reasons for that. The first thing is what's going on in the US right now. What we've seen is higher corporate leverage, companies doing buybacks. We've seen the fiscal deficit position widening out and all of those things have created volatility around the position or the Fed policy, so in terms of the growth and inflation outlook and also the US dollar.
Within Europe we’re starting to see economic growth slowing down, we’re seeing a number of issues there, Brexit of course being the primary issue there. Then outside of that we've also seen some political issues, some macro issues, but they’ve been mainly confined to outside of Asia. I think that’s the point about Asia is that with all this volatility going on, the political uncertainty, policy uncertainty, is that Asia stands out as a beacon of stability, which we haven't been able to say in previous years, but right now the politics looks very good, the macroeconomics looks very solid.
Most of the countries in Asia have a current account surplus. A large portion of the world’s foreign exchange reserves are also in Asia, so right now what we see is quite a stable macroeconomic picture in Asia, and that’s against a backdrop of greater volatility around the region outside of Asia.
What is your case for Asian equities?
So against that policy of macro backdrop, what we see in Asia is that valuations are also attractive, certainly relative to the developed markets, Asian valuations are certainly very attractive, but also an absolute basis as well. After a very tough period for Asian equities last year, we’re starting to see a very strong performance this year, but it's entirely justified by valuation and earnings outlook. The earnings outlook now is broadly in line with the US, valuations are certainly at a big discount. The ability of companies in Asia to pay dividends is far greater than any other region globally.
Why choose Asia for income?
The opportunity really is in dividend growth, this is the greatest opportunity globally that we see today. The potential for Asian companies to pay more dividends is very compelling at this point. The pay-out ratios are the lowest globally, but the rate of dividend increase, as we've seen in our recent study, is very strong, so if that continues we expect that pay-out ratios will continue to increase, and we think that dividends per share will continue for years to come.
High yield vs dividend growth
A particular focus for our strategy is to really focus on dividend growth, as opposed to a pure high yield strategy. Now, there are a couple of advantages of doing this. The first thing is that if you invest in just a high yield strategy, firstly you are buying quite expensive stocks, but more importantly you become very sensitive to moves in cash rates and bond yields. So as we've seen in the current environment it's been a positive, so bond yields in the US have come off, and bond proxy type stocks, high yield stocks have done well, but when things turn and growth comes back into fashion, then what we’ll see is that dividend growth stocks will perform much better.
Now, dividend growth stocks tend to be an all-weather strategy, they perform when markets are going well and when markets are doing badly as well. It becomes an alpha generating strategy by itself. These companies are increasing dividends despite the macroeconomic environment and that is very compelling. So owning companies with strong balance sheets, strong free cash flow, and the willingness to increase dividends, is something that will stand the fund in very good stead for the years to come.
How are you positioned in this environment?
Our focus still remains on China, and China is overweight for the strategy. It's an area where we see good valuations, it's an area where we see dividends, increasing and the macroeconomic environment should be more stable into the second half of 2019.