atans1

New thinking on Asian stocks

In China, Economy, Investments on 25/11/2009 at 6:26 pm

This appeared in today’s BT.

Writer, Lee King Fui, a fund mgr from Schroder, advocates buying Asian stocks that pay good dividends regularly. Investors in Asian stocks used to consider this kiddie stuff. You bought Asian shares because they gave spectatcular capital gains. You wanted dividends,  you bought into wimps in the  US, UK, European.  Asia was for he-men, not girlie-men

Can’t say much abt other markets, but such a strategy would have worked here esp as there were tax credits to be used up. Now gone alas.

“To participate in … long-term economic growth of Asia, investors may wish to look at an investment strategy that focuses on the dividends of companies. While not intuitive, capital return has rarely been a dominant component of total return nor has it a strong relation to economic performance. Other studies on the US and the rest of the world have reached a similar conclusion. In fact, our empirical investigation into the historical make-up of total return for Asia from 1994 to 2008 shows that dividend return is by far the largest component of total return, and bears a much stronger correlation to economic growth.

‘The reason why dividends closely track economic growth is not hard to comprehend; dividend payouts are driven by company fundamentals such as earnings and cashflow which are directly impacted by prevailing economic conditions. Stockmarket appreciation, however, can sometimes be driven by less fundamental factors such as sentiment, momentum and liquidity. Therefore, investors looking to invest in Asian markets because they want to participate in the region’s strong economic growth are more likely to achieve their objectives in the long-term by focusing on capturing the dividend return of Asian companies, than by targeting the capital return of stocks. In essence, they should be owning assets that pay shareholders to own them over time.

‘Focusing on dividends also helps one identify fundamentally strong firms. Because managers have better inside knowledge of their companies, dividends are often used by them to signal superior information about their firms’ future earnings and growth prospects. In our study of dividend payouts in Asia, we have found a positive relation between the dividend payout of companies and their future real earnings growth, thus supporting the existence of dividend signaling in the region.

‘However, investing in companies paying high dividends goes beyond investing in companies that are signaling high expected earnings growth. Often, companies that have high payout ratios have tended to be companies with good corporate governance standards as well. Because the disbursement of free cashflow as dividends helps to limit the potential for inefficient managerial investment or insider expropriation, agency costs are alleviated and the interests of managers and shareholders are aligned.

‘Indeed, in a region like Asia where corporate governance is improving but not necessarily always strong, picking companies which share their earnings growth with minority shareholders via dividends actually helps investors pick companies that have credible management.

‘The financial scandal at a leading Indian IT outsourcing company earlier this year is a case in point. The admission by the chairman then that he had been falsifying company accounts and inflating assets for several years had rocked the corporate community. A dividend-focused strategy would have helped one avoid this investment pitfall as the company had been paying no dividends for many years. Certainly, a company that was reporting double-digit earnings growth and sitting on a reported huge cash pile but paying no dividends would have pointed any dividend-focused investor to either poor capital management, weak corporate governance or, in this instance, fraudulent accounting.

‘[B]esides some of the more conventional dividend hunting grounds such as Australia, Hong Kong and Singapore, we are increasingly seeing opportunities in some of the developing markets. In particular, we like markets like China and India, as we believe these countries have much scope to grow their dividend payout ratios going forward, from current low levels of 38 per cent and 22 per cent to the Asian average of 47 per cent. The growth in their dividend payments will also be underpinned by the huge economic growth potential of these emerging giants.

‘We also see vast dividend potential in the smaller developing markets, like Thailand and Indonesia. For Indonesia in particular, the dividend paying culture has been continually improving over the last few years, with payout ratios rising from 31 per cent last year to 42 per cent this year. This trend of higher dividends will be further supported by the stronger and more stable political environment, which should lessen the need of Indonesian companies to retain excessive cash on their balance sheets to offset macroeconomic uncertainty.

‘Overall, we continue to believe that the long-term case for investing in the region remains compelling. Not only do regional markets offer good opportunities for investors focused on dividend yield, they offer the scope for greater participation in the region’s strong economic growth as well. Asia is now one of the highest dividend payout regions in the world, and this trend of improvement is set to continue. Indeed, the dividend yield available from Asian markets stands at 2.8 per cent which compares favourably to the yield in global markets of 2.6 per cent. [BTW STI index yields about 3.3% as at Sept]

‘[T]he dividend growth that we have seen in Asian equity markets has not been at the expense of dividend cover, which is at a relatively good level. Sources of dividend yield across the region have also become more diverse with many of the regions’ markets trading on attractive yields. Indeed, the improvement that we have seen in Asian dividends is a structural – rather than just a cyclical – development, helping to lay the foundation for more sustainable dividend payments, and justification for a longer-term re-rating of Asian markets in general.”

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