2017 was an exceptional year for Asian stock markets, but it has been a more turbulent ride since the start of 2018. From trade tariffs, to slowing global economic data, volatility has re-emerged and the bull market in the region no longer looks on such a sure footing. Have we seen the best for Asian stock markets?
Certainly, the environment of 2017 was unusual – low volatility, high economic growth saw most global stock markets edge higher; but this was particularly true for Asian markets, where growth was higher, earnings were stronger and valuations looked more attractive. Although the market mood has shifted this year, we don’t believe last year’s strength was based on sand. There were real, tangible factors supporting the recovery and these continue today.
Most importantly, much of the stock market recovery across Asia was supported by strong earnings. This is a notable contrast to the US, where buybacks were more influential in supporting share prices (https://www.ft.com/content/5f062834-3f51-11e8-b9f9-de94fa33a81e), or Europe and Japan, where the gains have been currency-related. Asian companies are generating significant free cash flow and have been for several years. Having used that cash to pay down debt, they are in a position to invest in new sources of growth, which in turn has driven higher earnings.
This is good news for investors like ourselves who look for income in the region. It means dividends are ‘organic’, derived from the strength of the underlying business rather than from financial engineering. This means they are sustainable and have room to grow.
At the same time, the dividend agenda is spreading. One of the biggest challenges for income investors in Asia is that some of the largest companies did not pay dividends, in spite of holding lots of cash on their balance sheets. This set a poor precedent and reinforced the view that Asia lagged in terms of corporate governance.
This year, for the first time, Korean telecoms giant Samsung Electronics has started to pay a meaningful dividend. While the yield only sits at around 1.4%, it is symbolically important. They have also appointed a number of non- Korean board members. This is a recognition that as a global company, with an international investor base, they need to meet international standards of corporate governance and is an encouraging sign for companies across the region.
The economic background remains supportive for continued growth in earnings. The IMF expects emerging and developing Asia to grow at around 6.5% over 2018–19, broadly the same pace as in 2017 (https://www.imf.org/en/Publications/WEO/Issues/2018/01/11/world-economic-outlook-update-january-2018). Notably, the region continues to account for over half of world growth.
That said, there is some concern around the health of the global economy. Recent weak GDP growth figures from the US, declining manufacturing data in Europe and the weakness in the UK have suggested waning growth momentum. At the same time, some economists fear that US tax cuts and US/China trade wars will prove inflationary, which in turn will push up interest rates, which could trigger a recession. Either way, the current punchy pace of global growth is not assured.
Asia has historically been seen as cyclical – exposed to the fortunes of the global trade and demand growth – and could therefore be vulnerable if the global economy started to retreat. This is an important consideration and something we keep a close eye on, but we would argue that intra-Asian trade is far more important than it has ever been.
Asian Development Bank’s chief economist Yasuyuki Sawada said at the recent launch of the bank’s Asian Development Outlook report that not only had the trade wars ‘not made a discernible dent in volume trade flows to and from developing Asia’ he added, “there are other international and global trade regime changes ongoing. It’s very unbalanced to pick one particular policy change to talk about the negatives.” (http://www.ifrasia.com/trade-tensions/21337475.fullarticle)
The Regional Comprehensive Economic Partnership (RCEP) is one example. This is a network of free trade agreements between the ASEAN nations and six partners – China, South Korea, Japan, India, Australia and New Zealand – which together account for US$23.8trillion of GDP (30% of global GDP) It creates a “a modern, comprehensive, high-quality, and mutually beneficial economic partnership agreement”, and would be the largest free trade agreement in the world.
We aim to ensure the companies in the Aberdeen Asian Income Fund are networked into this intra-regional growth, seeking to build their businesses within Asia rather than outside it. For this reason – and its relative lack of dividends – we hold nothing in India. To our mind, this domestic focus makes the portfolio far less vulnerable to a deterioration in the global economy.
We believe companies present good opportunities such as SAIC Motor, which has joint ventures with General Motors and Volkswagen, alongside a portfolio of domestic car brands such as Roewe, one of the few domestic Chinese luxury car brands. It is a key beneficiary of consumption growth across the region and is investing in new autonomous vehicles. At the same time, it has good governance and a dividend yield of 4.8% (https://markets.ft.com/data/equities/tearsheet/summary?s=600104:SHH ).
2017 was a strong year for Asian markets, but the recent volatility should not be taken as a sign that its strength is waning. There is still considerable economic strength in the region, and it doesn’t not look as vulnerable to the fortunes of the global economy as it has in the past. In fact, we would argue, the best may yet be to come.
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