Last year already seems a distant memory for many Asian equity investors but a much-changed backdrop in 2023 should do little to dampen the opportunities for income investors.
Asia, like everywhere, endured a tough 2022 as inflation and interest rates ratcheted up across the world. But it was particularly hurt by the strong US dollar, weighing heavily on monetary policy in the region.
Meanwhile, China’s rolling lockdowns and legacy Covid-19 restrictions also provided a constant drag on markets, not to mention its own growth travails. However, throughout this, Asian equity income has provided much needed ballast for investors.
The outlook for this year remains uncertain as the impact of higher interest rates have yet to be digested, and quite where US terminal rates end up remains to be seen, especially in light of recent volatility within the US and European financial sector.
It’s hard for Asia not to be affected by the volatility but we are relatively sanguine about Asia’s ability to weather the storm. In certain countries, stronger external accounts and government balances are going to be good places to hide. And the extent to which headwinds might be easing is where our eyes are trained.
China’s reopening story continues to bolster the region, while we also expect to see more sector-specific support. The waning of US dollar strength and weaker commodity prices should provide Asian economies with greater flexibility.
There’ll be no change to the team’s approach; we’ll do what we’ve always done: trust our income process and focus on governance, strong franchises and companies which have greater earnings certainty, all the while ensuring the companies in which we invest meet our strict yield criteria and we don’t overpay for them.
Beyond China
We position the strategy for the long term, looking at stability and quality of earnings. We are always optimising our positioning, though; we have tweaked the make-up of our overweight to financials, moderating exposure to those big beneficiaries of rising rates following strong performance and moving into those driven more by loan growth and volumes.
At country level, diversificayion is key. For example, the strategy’s long-held underweight to China endures, a position that has contributed to lower volatility than the more China-centric benchmark. It also means sitting out of much of the first-hand ramifications of China’s geopolitics and avoiding some of the dubious governance practices that seem to be rife there. It’s also worth remembering that investing in Asia is not all about China; indeed, we have been underweight for years but have still performed well.
Investors shouldn’t just buy Asia for Asia’s sake or for yield’s sake. If they do, they can quickly find themselves exposed to state-owned enterprises such as Chinese banks. An active eye is the key to investing successfully in Asia and it is very important to be discerning.
Under the Radar
Within the region, we are notably positive on the longer-term prospects of Indonesia, a country underrepresented in the index, but one that has a population of some 274 million people. It boasts a strong demographic profile and has been a beneficiary of reshoring and foreign direct investment. Indeed, Tesla is looking into opening an electric vehicle manufacturing plant there, while Hyundai established its first factory in the country last year
Singapore is another favoured area, where the strategy is overweight. Again, the country boasts strong governance, attractive yields, while its companies benefit from solid inter-regional trade, most notably with South-East Asian economies.
Over the long-term, the strategy has delivered better returns with a lower risk profile than the index and peer group. This is because of a focus on dividends as the preponderant part of the total return. The longer-term benefits on compounding dividends at a higher rate than the market helps to ensure statistics are in your favour – seeing the bright lights of Asian growth, it’s easy to overlook the merits of a consistent income approach, something many investors seem to have done over the past few years but are now looking to recalibrate positioning.
Zoe Khan is portfolio manager at Newton Investment Management and lead manager of the Asian Income Strategy
