Asia remains one of the best places to invest for income, in my view, although the region can be misperceived.
People sometimes think in terms of emerging markets, but the Asia Pacific region ex-Japan includes arguably developed economies such as Singapore, Taiwan, South Korea and Australia. The pay-out ratio for the region as a whole is at a healthy level – evidence that managers of businesses are happy to share profits with owners.
In the Asian equity income strategy, I prefer large companies that are well managed, with strong balance sheets, good pricing power and an ability and willingness to pay healthy dividends. This helps to reduce risk, I believe. These companies have a track record, are liquid and have further room to grow. I would expect them to be resilient in a higher interest rate environment.
I have always been underweight China and even more so now. I prefer to invest in democracies, countries that have freedom of the press and an independent judiciary so that if the government tries to change rules arbitrarily, companies can appeal to the courts. Stock market returns in China compared to GDP growth have been abysmal and lag those of both the US and Australia.
Geopolitics are important to markets, and this has been shown in the way Russia, in the wake of its invasion of Ukraine, has been ostracised by governments and by consumers. This may be a playbook for what could happen to China one day. I think companies are more wary of investing in China for political reasons.
China’s economy is under enormous pressure at the moment due to the lockdown to control the spread of Covid-19. There is no way of knowing when the «zero covid policy’’ will end. It could be tomorrow or in the second half of the year or in a year’s time. A reasonable assumption though is that the policy is unsustainable because the economy is in such a mess. There are early signs of some reopening in Shanghai at the time of writing.
I think it makes sense to have indirect exposure to China via companies and countries that we expect will benefit when there is a bounce back in activity: Taiwan, Singapore, South Korea and Australia are among them. The strategy is overweight Australia, which is one of the few economies that has experienced upgrades to 2022 economic forecasts over the past six months despite the Omicron wave and the Russian invasion of Ukraine. This reflects the array of hard and soft commodities, including food, that the country exports and the rise in gas prices that has improved their terms of trade.
I am happy to invest in sectors that some others avoid. The strategy’s largest holding is an oil and gas company, the second largest is a mining company and the third largest is a tobacco company. This year, many sectors that ESG (environmental, social and governance) labelled funds have been ignoring have had strong performance. I do not ignore ESG, but I am not constrained from investing in whole sectors. If a company has good governance, obeys the laws, and supplies goods or services that people need and are happy to buy, that is what is important to me.
Technology is a sector that has not been performing so well this year. At some point it will make sense to increase the weighting to technology when the valuations look really appealing. I do not feel in any particular hurry to do this, but Asia has some great technology businesses.
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