This article is part of Morningstar's Guide to Investing for Income
Emma Wall: Hello, and welcome to this 'Investing for Income Special.' I am Emma Wall and here with me today is Mike Kerley, manager of the Henderson Far East Income Trust (HFEL).
Hello, Mike.
Michael Kerley: Hi.
Wall: So, I thought we'll talk today about where you are seeing income within the region. It's been a region that's under some pressure over the last year or so with the taper tantrum last year almost working itself out, now we've got the threat from developed markets, the U.S. in particular, over an interest rate rise. Is this going to be taper tantrum Mark II?
Kerley: I don't think so. I think there's going to be some volatility. I think ultimately interest rates will end up lower than they have been pre-2007. So, there may be some volatility as we move, I don't know from 50 basis points for interest rates maybe up to 2%, but I suspect it is unlikely we're going to get to 3% like we were pre-2007.
So, the story for income to my mind remains i.e. you can get decent uplift on equity yield over deposit rates and cash. So, I don't think that changes.
Wall: And you're able at the moment to get 5.65% yield on the trust, which is significantly better than you're getting on cash or even on a lot of developed market equities, S&P less than 2%. So, looking at the region, where is the best income flowing from. Who are your favourites?
Kerley: Well, I mean, I think it's interesting. This is the thing I think for Asia, or rather equity income strategies, is that there is a plethora of income across lots of different sectors. I think when you look at developed markets, you look at utilities, you look at healthcare, you look at consumer staples. But in Asia we have yield in tech, we have yield in industrials, financials, property et cetera, et cetera. So, I think the choices we have are probably far greater.
Currently, I think technology looks quite interesting and we have quite a decent weighting there. Also property, which again go slightly against the rising interest rate environment, but we think the valuations and the underlying demand for property are really quite interesting. So, we can get yields on property companies even outside of REITs 4%, 5%, 6%, which again to us looks pretty attractive.
Wall: I know you have been focusing more on domestically-focused stocks, is that because you don't really like the macro influence from outside the region or is that because there are some great opportunities in particular stocks?
Kerley: Well, I think over the longer term, I think whether you are investing for income or growth, you have to focus ultimately on underlying fundamentals. I think Asia offers you longer term growth opportunities much more so than the developed markets do. And within that clearly domestic stocks and domestic sectors will be favoured because the exporters rely on global growth rather than Asian growth.
However, I do think we are in kind of recovery phase or second leg of the recovery phase in developed markets. So, and I said to you earlier about technology, we think technology for the next 12 to 18 months looks pretty interesting new products cycle.
So, generally, I think the portfolio is focused on domestic areas because of that long-term growth uplift over developed markets. But in the shorter to medium term, the portfolio is more balanced.
Wall: Do you have to then look very much at what's going on with the macro, if you're having a domestic focus? Because I know that you're significantly underweight Australia and overweight Singapore. Is that because you really believe in the political and macro situations for that country versus another?
Kerley: It's not really macro. I mean, for us it will comes down to the stocks. It's interesting, back as you say prior to the middle of last year, when we had the taper tantrums, yield was getting really quite expensive. Everyone was piling into yield, almost irrespective of price, and that's kind of adjusted slightly, but I think you still need to be a little bit careful about how much you pay for that yield because you can put your capital at risk if you pay too much for an income stream.
So, we very much focus on individual stocks rather than saying a country is cheap or expensive et cetera. So that tends to favour at the moment towards places like China, where we think the market is generally undervalued and we keep away from Australia because of the reverse – the market is too expensive in our view.
Wall: Mike, thank you very much.
Kerley: It's pleasure.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
