Mark Dampier: Asia is coming of age - expect less rapid growth and more dividends
Friday 14 March 2014
Asia has been a disappointment for investors over the past 18 months. Some have been left wondering whether an area traditionally associated with rapid growth has lost its mojo. I think the reality is somewhat different.
Asian markets have had a strong run over the past 10 years. A significant development over this period has been the emergence of dividends. Dividends are sometimes seen as a sign of weakness – that the company has a lack of opportunities and pays dividends instead of reinvesting cash to grow the business.
Nothing could be further from the truth. Dividends are a sign of a company's cash discipline. Paying dividends year after year with the potential to increase them too requires a good business model.
As companies in Asia mature, more and more are able to pay attractive dividends. With many Asian companies being family led, the attraction of dividends is becoming more obvious as the older generations retire and require an income.
Newton capitalised on this early with the launch of the Newton Asian Income fund, under the stewardship of Jason Pidcock. The fund is now £4bn in size, showing how many UK investors like the opportunity to invest in Asia, but take a dividend too.
Over the life of the fund so far it has had three disappointing periods of performance worthy of note. Each lasted between five and seven months, the most recent being between May and November 2013. Mr Pidcock attributes this to a kneejerk reaction by the markets following a speech by Ben Bernanke, the chairman of the US Federal Reserve, on the "tapering" of quantitative easing (QE).
High-yielding companies, which had been in favour with investors in a low interest rate environment, saw a wave of profit-taking as "hot money" was withdrawn from that area of the market. The fund usually holds up relatively well in a falling market, but as it was high-yielding companies bearing the brunt of the selling there was no shelter on this occasion.
Mr Pidcock notes that each period of poor performance tends to be followed by a longer period of stronger performance which he is now anticipating. Valuations look attractive, as does dividend growth. In 2013 income payments were hurt somewhat by strengthening sterling, but I suspect this will eventually reverse itself. With a current yield of 5 per cent it could be said investors are being rewarded for their patience – they are getting an attractive income now while they wait for the prospect of long-term capital growth.
Like many at Newton, Mr Pidcock starts with a "big picture" view. Using Newton's trademark thematic process he aims to identify the themes set to drive long-term growth, and then looks for the companies set to benefit most.
Sands China, the resort and casino developer, was last year's best performer. The company also paid a special dividend and overall increased its dividend by 29 per cent. Some profits have since been taken, as while he remains positive on the company, he doesn't want too much risk to rest with one stock.
There were a couple of stock-specific issues last year, including New Zealand telecoms company Chorus, which fell more than 40 per cent last November and has since been sold. To be fair to Mr Pidcock, this was down to political interference rather than a problem with the company.
A new theme recently introduced to the fund is "havens", by which Mr Pidcock means companies with a genuine competitive advantage and sustainable business model with the potential to offer protection in an inflationary environment. He cites Dexus Property Group, a leading Australian player which invests in high-quality office, industrial and retail space.
Thirty years ago, investors who wanted growth and income really had only the UK market to choose from. Today investors can search globally and Asian markets yield some of the best prospects for income growth. Since launch this fund has performed exceptionally. I have a holding in my own ISA which I am likely to add to following this period of weakness.
Mark Dampier is head of research at Hargreaves Lansdown, the asset manager, financial advisor and stockbroker. For more details about the funds included in this column, visit hl.co.uk/independent
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