Mike Kerley, Co-Manager of the Henderson Asian Dividend Income Strategy, provides his team’s view on the recent volatility in Chinese stock markets, its impact on dividend investing in Asia and current portfolio positioning.
Chinese markets began 2016 on a weaker footing despite recent more stable economic data, including rising new orders in the manufacturing sector, real narrow money growth (M1)1, and a rebound in land sales in the biggest cities. Market sentiment has been hit by uncertainty about the weakness of the Chinese currency; however, we believe this to be more a reflection of US dollar strength than the depreciating yuan. The Chinese authorities have been poor in their communication around the new currency regime, which has given rise to increased uncertainty for both domestic and foreign investors. Domestically, there has been some capital flight and a rush by entities with unhedged overseas liabilities to cover their positions. This, in turn, has led to a sharp decline in foreign exchange reserves and accusations that the Chinese have lost control over their economy and currency.
China contagion unlikely to spread
We anticipate further volatility in the Chinese markets given the recent decision by the US Federal Reserve to raise interest rates, coupled with geopolitical worries in the Middle East. From a fundamental perspective, any contagion effect from China should be contained, but liquidity flows based on momentum and sentiment are sizeable and difficult to track. While uncertainty in China is undoubtedly affecting Asia, the region is also faced with slowing global trade, weaker currencies and heightened risk aversion.
Sticking to our guns
At a time when some of the traditional high-yielding sectors appear overvalued relative to their own history and the region as a whole, and in an environment of slowing global growth and trade, we remain focused on domestic-orientated companies in areas where local economies are exposed to structural rather than cyclical growth.
The Asian Dividend Income Strategy continues to benefit from dividend growth in Chinese mainland ‘A’ shares such as bus manufacturer, Zhengzhou Yutong Bus, and air conditioner maker, Gree Electric Appliances. Positive contributions have also come from the holdings in US-listed Chinese stocks (ADRs)2 such as internet company, Netease, where we have recently taken profits.
We remain cautiously optimistic on the outlook for Asia, which we believe will remain resilient in the face of further developments in China. In our view, valuations remain attractive, especially relative to western markets, while reforms in key markets will improve the quality, if not the quantity, of economic growth across the region.
1 M1 or narrow money growth, is the total currency in circulation plus corporate demand deposits.
2 ADR (American Depositary Receipt) is a negotiable certificate issued by a US bank that is backed by physical stock held by the issuing bank. Each ADR represents a specified number of shares in a foreign stock that is traded on a US exchange.