Fund houses are talking up equity dividends as a valuable income source for investors in 2013, given attractive yields relative to government bonds and likely constraints on global growth.
“Asia is in a dividend sweet-spot since cashflows are growing together with falling capital expenditure and gearing levels,” says Matthew Sutherland, senior investment director for equities at Fidelity Worldwide Investment.
Gearing levels have been falling since the Asian financial crisis of 1997-8. With companies also hoarding cash post-2008, the average net debt-to-equity ratio of Asian companies is expected to sink to 30% this year, from 70% in 1997.
Further, Fidelity estimates that capex-to-operating cashflow for Asian equities will fall to about 65% this year, from 140% in 1997. Add in the consensus forecast earnings-per-share growth of 10%, and all these factors are supportive of companies increasing dividend payout.
Fidelity, for one, expects dividend payout ratios to continue to grow this year.
Only this week, it emerged that companies listed on the Shanghai Stock Exchange had been told to return 30% of profits to shareholders via dividends. Since 2000, dividend return accounts for 57% of total return on Asian equities.
HSBC Global Asset Management also sees Asian company balance sheets being supportive of paying increased dividends in 2013.
“In Asia, valuations have collapsed but profitability has not, which suggests a fundamental opportunity for investors in equities, especially China and Korea,” says Bill Maldonado, Asia-Pacific CIO and strategy CIO for equities at HSBC Global Asset Management.
Sutherland cautions investors to be conscious of the sustainability of the income, given that high-dividend-paying stocks are particularly sensitive to cuts in the pay-out ratio, which can trigger serious corrections.
But he argues that such income is not only a defensive ploy in a falling equity market. “The long-term chart demonstrates that equity income as an asset class performs very well and beats the market over the long term,” says Sutherland.
For Asian equities generally, Sutherland suggests valuations are cheap, with price to 12-month forward earnings below their long-term historical average globally. Further monetary stimulus globally could trigger a re-rating upwards.
Moreover, China’s economy is likely bottoming out, with economic reforms and rapid urbanisation opening up unheralded investment opportunities within the consumer sector.
On the debt side, with Asian and high-yield bonds having performed so strongly across 2012, Fidelity dampens expectations that returns will be as good this year.
Strong demand for low-volatility assets pushed bond prices up last year, with global corporate, Asian dollar, emerging market and high-yield debt across the US, Europe and Asia all priced at a premium in November.
Gregor Carle, the firm’s fixed-income investment director, says: “We believe corporate bonds will continue to offer a compelling risk-return profile, but taking current valuations into consideration, investors need to be prepared to accept lower returns in higher yielding assets than they have seen in 2012 and possibly allocate more of their assets into lower-risk offerings, such as investment-grade bonds.”
For its part, HSBC Global Asset Management holds a positive outlook on Asian local currency bonds with key indicators such as Asian bond spreads and debt issuance at healthy levels in the region and Asian currencies remaining significantly undervalued versus developed peers.
The firm is more cautious on EMD given strong performance last year, but it notes inflows into the asset class are still supportive and the yield pick-up still attractive on a relative basis.