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24 November 2016

Income hunting: Asian equities and bonds

By James Yardley, senior research analyst

Asia isn't the first place people think of when it comes to income investing and, at first glance, Trump's abandonment of the Trans Pacific Partnership (TPP) this week doesn't bode well for the region. But there may be more to the area's prospects than meets the eye.

This month in income hunting, we take a look at a few ways to add some Asian income into your portfolio and bring you an update on the regional outlook with a Trump presidency.

Trade with China versus the US

The 12-member TPP was set to give Asia Pacific nations including Singapore, Malaysia, Vietnam, Japan and Brunei better access to the US market. Exports were predicted to pick up, boosting economic growth. Vietnam, in particular, stood to benefit because it is currently one of the most 'closed' to global economies, while Singapore, with its large port, hoped to become a key player in shipping trade products around the region.

Technically, the TPP can still proceed without America, but it has lost what many considered the key incentive for participating countries. Fortunately from an investor's perspective, another trade deal has been brewing – the Regional Comprehensive Economic Partnership (RCEP). Unlike the TPP, the RCEP includes China, meaning another economic powerhouse would step up to the plate in place of the US.

What's more, other regional initiatives are underway, such as the Free Trade Area of the Asia Pacific and China's 'modern day silk road', which is essentially an infrastructure project to increase roads, railways and connectivity within central and south-east Asia.

US dollar matters

Currency plays a key role in any emerging economies' prospects and the (unexpected) US dollar strength following a Trump win has hurt these markets recently. This is because many emerging markets borrow (i.e. issue bonds) in US dollars, as opposed to their local currencies, in order to attract international investors.

So if the value of their own currency declines, their debt suddenly costs more to repay. Unfortunately this may be one element of the emerging market puzzle that won't change any time soon. A US interest rate rise in December is now considered highly likely (and higher US rates means the dollar becomes more valuable to investors, which is what pushes up the price).

Expectations drive the behaviour, so if further rate rises are predicted after December, the dollar may well continue to rise.

US election: What the fund managers are saying

So what does this mean for investors?

Asia remains the fastest growing region in the world, particularly when both China and India are included in the count. In my mind it is an area investors can't afford to miss out on and the trick is ignoring the short-term 'noise' to focus on finding good companies whose long-term prospects remain strong.

Yes, politics at the moment are particularly unpredictable, but emerging market investors should be aware that kind of uncertainty is par for the course.

Income investors should be quite well positioned, as dividend-paying stocks tend to be more established companies that are often less volatile. Many Asia funds also include Australia and New Zealand in their Asia Pacific investing universe, which means you won't necessarily be holding a portfolio of purely developing markets.

The Elite Rated Schroder Asian Income, with a current annual yield of 3.6%, is one such fund. Its second-largest geographical weighting is to Australia, while its largest is Hong Kong. Manager Richard Sennitt has run the fund for 15 years, which means he's seen investors through several previous political ups and downs.

The Elite Rated Charlemagne Magna Emerging Markets Dividend is another good way to play the income theme, with a current annual yield of 3%. China and Taiwan are its two biggest holdings, and along with India, Korea, Malaysia and Thailand, Asian countries comprise around 65% of the portfolio.

As something a bit different, you could also invest in bonds, which would be a lower risk prospect than equities. Elite Rated Standard Life Emerging Market Debt has around an 18% weighting to Asia and a current annual yield of 3.9%. As a broad emerging markets fund, it has exposure to other regions too, including a 40% weight to Latin America. That said, manager Richard House has beaten the Investment Association's Global Emerging Market Bond sector every year since launch in 2012 and the fund currently has an income around 3.8%. Richard travels to many of the countries where he invests and attends annual International Monetary Fund meetings, both of which give him insights his competitors don't have.

Where to next?

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Darius' views are his own and do not constitute financial advice.

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