The impact of Covid-19 is likely to endure, even after lockdown measures are lifted.
Yoojeong Oh is the investment manager of the Aberdeen Asian Income Fund Limited. Here she discusses the post-Covid investment landscape in Asia.
Asian dividends have been resilient through the pandemic
Governments haven’t put conditionality on financial help and Asian companies were generally in better financial shape
Selectivity is still important as part of sustaining ESG standards
The Covid-19 outbreak has challenged many long-held investment assumptions. Nowhere is this clearer than for investors who rely on their investments for income. Previous safe-havens have looked vulnerable, while ‘spicier’ areas have looked resilient. We believe the outbreak has put Asian dividends in a new light.
Asia has seen the development of a dividend culture in recent years. As corporate governance has improved across the region, companies have been more inclined to return cash to shareholders. Many investors have started to look to Asia to add growth and diversification into their income portfolios. However, in our view, including Asian dividends into a portfolio may also help build resilience.
The post-Covid landscape is still unclear. While Asia may be ahead of many Western countries in unlocking its economies and moving ahead with economic recovery, it is not out of the woods and cannot stand independent from any weakness in the global economy. Nevertheless, a few key elements have emerged that suggest the region may not see the dividend rout that has bruised investors elsewhere.
In general, Asian governments haven’t put conditionality on any financial help they have provided to companies. In contrast to many Western markets, governments generally have not limited dividends for those companies those that have furloughed staff or taken favourable government loans. Asian companies are, by and large, still free to pay dividends to shareholders as they see fit
Equally, while Western companies have had to withdraw dividends to conserve cash, this has not been true for Asian companies, which have consistently tended to run with higher cash balances. According to analysis by Nomura, only 18% of the top 100 non-financial US companies held a net cash position on their balance sheets; but this rose to 48% of Chinese or Hong Kong-based firms. The equivalent ratio for the UK was 21%. Not only does this help them pay dividends in the short-term, it should help their recovery in the longer term.
Asian companies already tended to pay out a lower proportion of their profits as dividends. This means they have more scope to sustain dividends even if earnings are under pressure. As a result, there have been fewer dividend cuts in Asia to date and generally only in those sectors feeling the full force of the virus – travel, leisure or airlines.
We see many Asia-listed companies that are global leaders in their respective industries with strong economic moats and competitive advantages, which also creates resilience in their income payouts to investors. For example, we hold Taiwan Semiconductor, which has been the world’s dedicated semiconductor foundry since 1987; and Samsung, which is global leader in memory chips. Both companies have net cash positions on their balance sheets.
However, it can’t be overlooked that one of the reasons Asian dividends have held up so well is that some of the major companies have large government holdings. Particularly in China, many businesses are still majority-owned by the state. As such, governments do not want to cut off their own income by halting dividend payments.
While this is good for dividend yields, there are plenty of other reasons why we wouldn’t want to own companies with large state ownership. They may not be run in the interests of minority shareholders, for example, and may not meet our environmental, social and governance standards. We prefer to invest in those companies where our interests are aligned with those of the management team. Often this means investing in family-owned businesses.
In these volatile markets, it can be tempting to go ‘bottom-fishing’, but we believe searching for quality companies is even more important today. The recent rout has given us ample opportunity to buy into quality companies at lower prices. We always have a wish list, but in normal markets they are often too expensive.
However, amid this volatility, the market has not made any significant differentiation between low and high quality companies. As such, this has been an opportunity to buy into some exciting new areas at attractive valuations. During the indiscriminate market sell off, we initiated a position in APA Group, an Australian listed gas transmission company with 4.4% dividend yield, when it reached our target price. This company scores the highest possible AAA MSCI rating for ESG thanks to a well-established ESG framework that makes them industry leaders in health and safety, climate risk assessments as well as development of renewable energy sources.
Overall, this process has also helped shore up the dividend for the longer-term, rebalancing the portfolio towards high quality companies with a robust dividend yield and the potential for long-term growth in that yield. As it stands, the discount remains below its long-term average (https://www.hl.co.uk/shares/shares-search-results/a/aberdeen-asian-inc-fund-ordinary-npv-shares), meaning investors are getting a higher quality income at a lower price.
The Asian recovery from Covid-19 is not just a function of timing. Asian economies were in a better position to weather this – or any other – storm. Asian governments tend to be less indebted, which gives them greater room for manoeuvre compared to their Western equivalent and already had a number of important growth drivers in place: from better demographics to a developing consumer. Covid-19 may have stalled the region’s growth, but it has not derailed its long-term competitive advantage.
To our mind this should prompt a change in thinking. Often, investors have had UK equity income as the core of their portfolio, with Asian dividends there for some growth and diversification. However, if Asian dividend pay-outs prove more resilient than their Western counterparts, they can lay claim to an important role as a stabilising force for an income portfolio.
Risk factors you should consider prior to investing:
- The value of investments and the income from them can fall and investors may get back less than the amount invested.
- Past performance is not a guide to future results.
- Investment in the Company may not be appropriate for investors who plan to withdraw their money within 5 years.
- The Company may borrow to finance further investment (gearing). The use of gearing is likely to lead to volatility in the Net Asset Value (NAV) meaning that any movement in the value of the company’s assets will result in a magnified movement in the NAV.
- The Company may accumulate investment positions which represent more than normal trading volumes which may make it difficult to realise investments and may lead to volatility in the market price of the Company’s shares.
- The Company may charge expenses to capital which may erode the capital value of the investment.
- Movements in exchange rates will impact on both the level of income received and the capital value of your investment.
- There is no guarantee that the market price of the Company’s shares will fully reflect their underlying Net Asset Value.
- As with all stock exchange investments the value of the Company’s shares purchased will immediately fall by the difference between the buying and selling prices, the bid-offer spread. If trading volumes fall, the bid-offer spread can widen.
- The Company invests in emerging markets which tend to be more volatile than mature markets and the value of your investment could move sharply up or down.
- Yields are estimated figures and may fluctuate, there are no guarantees that future dividends will match or exceed historic dividends and certain investors may be subject to further tax on dividends.
- Derivatives may be used, subject to restrictions set out for the Company, in order to manage risk and generate income. The market in derivatives can be volatile and there is a higher than average risk of loss.
Other important information:
Issued by Aberdeen Asset Managers Limited which is authorised and regulated by the Financial Conduct Authority in the United Kingdom. Registered Office: 10 Queen’s Terrace, Aberdeen AB10 1XL. Registered in Scotland No. 108419. An investment trust should be considered only as part of a balanced portfolio. Under no circumstances should this information be considered as an offer or solicitation to deal in investments.