Five investment themes for 2019 and beyond
2019 has been an interesting year so far. Global stock markets started January in the doldrums, only...
While home-owners in the UK naturally focus on the Bank of England’s interest rate decisions, (mainly because it impacts our mortgage payments), investors tend to focus on the US Federal Reserve’s actions, because its interest rate policy has the power to move global markets.
So the financial pages last week were keenly focused on the US’s first interest rate cut in a decade.
But what about the rest of the world? According to Goldman Sachs, 65% of central banks around the world have their interest rates on hold. 35% are cutting their rates and not a single one is raising them.
When interest rates go down, so generally does the interest paid on cash savings and the yield on bonds. So what does this mean for income-investors? Basically, the hunt for alternatives is back on and investors may once again be turning to dividend-paying companies to provide an income.
One area of interest currently is Asia. There too, rates have been coming down. The central banks of New Zealand, Australia, China, India, Philippines, Indonesia and South Korea, have all lowered their interest rates this year.
You may question why Asia comes to mind for ‘boring’ dividends, when it is such a vibrant and exciting growth area. But the region has actually experienced the world’s strongest dividend growth since 2009, thanks to rising profits and expanding payout ratios, and has one of the highest dividend yields globally – bested only by Europe.
The mounting pressure on Asian company management to distribute the swelling cash in their bank accounts is coinciding with a string of regulatory changes that are designed to bolster the trend of increased payout ratios.
And, in turn, if Asian companies continue to increase their payout ratios and dividends, it could be an exhilarating experience for shareholders. Research from Schroders has shown that such companies often undergo a valuation re-rating on the back of the associated improved capital management and enhanced corporate governance, and this can potentially lead to share price outperformance too.
A number of Elite Rated funds and trusts invest in dividend-paying Asian companies.
Guinness Asian Equity Income fund invests in companies across the whole Asia Pacific region, including Australia. It is invested in 36 equally-weighted stocks, and has a one-in, one-out policy, with the managers focusing on companies that can sustainably grow their dividend into the future. The yield on the fund is currently 4%*.
Jupiter Asian Income fund tends to invest in the most advanced and stable countries in the Asia region, due to their more mature approach to corporate governance. So companies based in Australia, New Zealand, Singapore and Hong Kong often to dominate the portfolio. It has a current yield of 3.6%*.
Schroder Oriental Income is an investment trust investing in the Asia region. Many of the stocks in the portfolio will already have attractive yields, but the manager also looks to exploit opportunities in companies which are set to benefit from improving capital efficiency, rising returns and increasing shareholder distributions. It has a current yield of 3.8%*
Murray International Trust is an investment trust that invests in companies (and some bonds) from all over the world. It currently has 28.7% of the portfolio invested in Asian companies and a yield of 4.5%*.
Manager Bruce Stout said recently: “With global central banks seemingly hell-bent on squeezing global bond yields down to zero and beyond, the negative consequences of such actions must not be ignored. Encouraging further debt dependency, punishing prudent savers, keeping zombie companies alive, fostering further income and wealth inequality, and inflating inherently volatile asset bubbles contradict the mandated responsibilities of central banks, namely creating economic and financial stability. Against such a backdrop, great caution
and prudence will continue to be exercised.”
*Source: fund factsheets, 30 June 2019