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Asia: Income options in an unusual climate

abrdn In partnership with abrdn

Yoojeong Oh, Investment Manager at Aberdeen Asian Income Fund Limited, looks at the latest options for contending with an ever-changing world.

  • Income investors have had to deal with falling interest rates, cuts to dividend payments and now, inflation

  • Stronger earnings growth in Asia has seen dividends recover to pre-pandemic levels

  • The emerging consumer and energy transition remain strong themes

Investors who look for an income from their investments have had to face down low interest rates and sliding dividends during the crisis. Today, they also need to contend with rising inflation as economic recovery builds momentum and prices rise. Their options may be shrinking, but Asian markets offer plenty for investors looking for a sustainable and growing income.

Asian companies have progressively increased their dividends in recent years, in notable contrast to sliding bond yields. For investors in the region, dividends have become a more important element of the return they receive on their investments. Perhaps more importantly, today, as companies benefit from economic recovery and dividends recover, there are plenty of good growth stories for both income and capital growth.

Earnings growth is coming back in Asia, but recovery is not universal and investors need to be selective. Some Asian countries are still struggling with outbreaks of Covid, in spite of having successfully contained the virus first time round. Nevertheless, companies in countries such as Taiwan,  Australia and Singapore are seeing a strong rebound in earnings. As dividend investors, these markets are our natural hunting ground. We are also finding companies in lower-yielding markets such as India and Korea with good cash generation and where earnings are recovering strongly.

With this earnings recovery has come a dividend recovery. The decline in dividends in Asia was more muted than in markets such as the UK, but was nevertheless significant. We now see dividends returning to pre-Covid levels. Last year, we had to dip into our revenue reserves to support the payouts to shareholders, which increased for the 13th consecutive year; we have built up our reserves over the past decade precisely for an exceptional circumstance such as 2020. Having said that, revenues for this year should benefit from improving corporate dividends.

Equally, we believe prospects for many dividend-paying Asian companies look good beyond this early recovery. Balance sheets in Asia remain very prudent, with low debt and strong cash flow which bodes well for dividends. In the longer term, this means any earnings recovery quickly translates into higher profits. It should also allow corporates to make choices that may not be available to their more indebted global peers. They can choose to increase dividends, for example, or buy back shares, invest in growth or pursue merger and acquisition targets. Not only is this likely to mean dividends are more sustainable, but should also improve capital growth prospects.

Compelling themes

There are some compelling long-term growth themes in the Asian market that transcend the recent crisis. For example, at Aberdeen Asian Income Fund, we continue to focus on the middle class aspiration theme. We have seen robust consumer discretionary spend as the crisis has ebbed. With this in mind, the portfolio has exposure to shopping mall operators and financial services providers, which benefit from growing consumer spend. This includes Momo.com, the self-styled “Amazon of Taiwan”, plus Singapore bank DBS, which has invested in its own digital consumer platform, making it easy for customers to find wealth management or insurance products.

The move to low carbon energy sources is another important theme in the portfolio as countries across Asia strive for net zero. This spans a number of sectors, including electric vehicle battery makers or utilities providers. We have a holding in Power Grid of India, for example, which is investing to increase renewables as a proportion of its energy mix. We also invest in KMC Chain, which makes components for e-bikes.

There have been concerns that China’s recent crackdown on technology companies will stall innovation in the country. We have a low weighting in China, and in particular, do not own the internet companies as they don’t pay dividends. This positioning has worked to our favour in recent months and we continue to monitor regulatory changes in the domestic market. The authorities need to balance entrepreneurship and innovation with social good alongside their common prosperity goals. We believe the recent correction in the Chinese stock market may offer some opportunities to add to quality businesses with strong business franchises and dividend paying capacity at cheaper prices.

Our quality-driven approach

Across the world, abrdn follows a quality-driven investment process. In practice, this means picking stocks with good cash-generative business models. We have an established team, based in Asia. Local knowledge and local language skills are vital when we meet companies across the region and to keep on top of local news flow.

Environmental, social and governance (ESG) criteria are embedded in our stock selection process. We find that companies are increasingly enthusiastic in talking about these issues. We also find that many companies are doing the right thing, but not disclosing it effectively and work with many companies to improve their internal procedures. This can result in a higher rating for the company and may benefit fund performance.

The trust has been a stable option in turbulent times. Not owning Chinese internet stocks has helped us avoid the recent volatility seen in the Chinese market, while Singapore banking holdings have benefited from the government removing the dividend cap. Our highest sector exposure is to technology hardware and we have seen good total returns from the sector over the past 12 months with dividend growth and special dividends. We have continued to pay a high and growing dividend to our shareholders through the crisis.

At a time when income is scarce and under threat from inflation, Asian dividend-paying companies, carefully chosen, are a stable option to grow income and capital. We see real opportunities as the global economy recovers.

© owned by each of the corporate entities named in the respective logos. Companies selected for illustrative purposes only to demonstrate Aberdeen Standard Investments’ investment management style and not as an indication of performance.

Important information

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.

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