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Asian Equity High Dividend Strategy

Seeking resilience amidst rising rates
20 May 2022
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    Key takeaways

    • Premium yield with growth optionality: Our Asia Pacific ex Japan Equity High Dividend strategy aims to offer premium yield relative to the market benchmark yield and steady income amidst market volatility
    • Resurgence in income investing: We see a strong resurgence in income investing in Asia since late last year, supported by multiple factors such as compressed valuations, policy easing expectations and strong corporate fundamentals
    • Attractive valuations: Valuations for Asia Pacific ex Japan and China are now cheap vs history, especially when adjusted for return on equity. Asia Pacific ex Japan is trading at 12.1x on a forward P/E basis, while MSCI China is at 9.8x over the same time period
    • Policy catalyst: Overall monetary tightening cycle in the region is lagging that of developed markets, and China is embarking on policy easing to counter its growth headwinds
    • Strong balance sheets: The fundamentals of Asian corporates remain solid with ample cash on hand and low leverage overall
    • Dividend recovery: In Asia, dividends have recovered sharply since 2021 after taking a significant hit in the early part of 2020 due to the pandemic
    • Hunt for yield: In Asia, dividends returned 219% between 2000 to end March 2022 and made up over 60% of the total returns of Asian companies, based on MSCI universe

    Source: Bloomberg, HSBC Asset Management, data as of May 2022
    The information contained in this publication is not intended as investment advice or recommendation. Non contractual document. This commentary provides a high level overview of the recent economic environment, and is for information purposes only. It is a marketing communication and does not constitute investment advice or a recommendation to any reader of this content to buy or sell investments nor should it be regarded as investment research. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of its dissemination. The performance figures displayed in the document relate to the past and past performance should not be seen as an indication of future returns. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. HSBC Asset Management accepts no liability for any failure to meet such forecast, projection or target.

    Asia – Staying safe and resilient

    Since late last year, a mixed bag of stagflation concerns, supply chain shocks and geopolitical conflicts has roiled the markets prompting a rotation out of fast growing technology companies and into shares of businesses that are more resilient and defensive amidst rising volatility. In addition, a rise in US interest rates and reduction of the Fed balance sheet have intensified the cautious mood.

    Against this challenging backdrop, we see a strong case for dividend investing in Asia driven by increasing appetite for strategies which are considered more defensive and have more income certainty. Asian corporates are supported by healthy balance sheets and lower debt levels than their historical average which bodes well for dividends. In addition, from a macro point of view Asian equity markets also benefit from compressed valuations, while rising rates are a persistent challenge. Moreover, the region’s monetary tightening cycle continues to lag that of developed markets especially the US.

    Solid corporate fundamentals

    Valuations of Asia Pacific ex Japan and China stocks are cheap vs history, especially when adjusted for return on equity. Asia Pacific ex Japan is trading at 12.1x1 on a forward price-to-earnings basis as of 10 May 2022, while MSCI China is at 9.8x1 over the same time period.

    Secondly, although Asia is affected by rising rate concerns, the monetary tightening cycle in the region is lagging that of developed markets, and China is embarking on policy easing to counter its growth headwinds. The world’s second-largest economy is expected to roll out more targeted measures to address its growth challenges in the property and services sector, as the zero Covid strategy halted production lines and deepened the home sales slump.

    Lastly, the balance sheets of Asian corporates remain solid. They are cash rich at an aggregate level, as some of them were forced to suspend or cut dividends in the past two years due to Covid-related uncertainties. On the other hand their capital expenditure plans are still relatively subdued in general, keeping their cash on hand rather than spending it on new business plans, due to ongoing caution around the macro landscape.

    As a result, Asian companies’ cash-to-market capitalisation ratio has been higher than that of developed market peers, suggesting that dividends of regional companies are supported by healthy balance sheets. Meanwhile, their average net gearing ratio – a measure of leverage – is relatively low at 25%, a figure that is way below United States and Japan, which are at 74% and 42% respectively, according to data complied by Jefferies as of 31 March 2022.

    MSCI regions (ex-fin) – Net gearing trend (as of March 2022)


    MSCI regions (ex-fin) – Net gearing trend (as of March 2022)

    MSCI regions (ex-fin) – Cash to market cap (as of March 2022)


    MSCI regions (ex-fin) – Cash to market cap (as of March 2022)
    Source: FactSet, Jefferies, HSBC Asset Management, data as of 31 March 2022
    Note: 1 MSCI, HSBC Asset Management, data as of 10 May 2022.
    Investment involves risks. Past performance is not indicative of future performance. Any forecast, projection or target contained in this presentation is for information purposes only and is not guaranteed in any way. HSBC Asset Management accepts no liability for any failure to meet such forecasts, projections or targets. The views expressed above were held at the time of preparation and are subject to change without notice. The information provided does not constitute any investment recommendation or advice. For illustrative purposes only.

    Solid earnings delivery

    Asian companies delivered strong earnings in 2021 with rising cash levels on balance sheets – this bodes well for dividends as we head into the second half of the year.

    At the moment, despite a high base effect in 2021 consensus earnings for Asia Pacific ex Japan and China in 2022 are still positive at 11% and 15%, respectively, compared with a 10% increase for S&P 500 companies, according to Bloomberg. Sector-wise, companies in the materials and energy sector generally fare through a slowing economy, given their cash flows on the back of soaring energy prices and rising demand as parts of the world reopen from the pandemic.

    Focusing on dividend recovery

    In Asia, the good news is dividends have recovered sharply since 2021 after taking a significant hit in the early part of 2020 due to the pandemic. Currently, 2022 dividends are about 40% ahead of the pre-pandemic level based on the latest forecasts and dividend revisions have been largely positive, suggesting the overall dividend level is likely to surprise on the upside this year.

    Hunting for yield

    Historically speaking, Asia’s dividends contributed over 60% of the total return from 2000 to end of March this year, and returned 219%, based on MSCI universe. Meanwhile, US dividends represented 44% of the total return over the same period. Income investing is a more compelling structural theme in Asia compared to the US, as dividend returns can potentially preserve and enhance the total return of the portfolio.

    Dividends are a significant piece of long-term total shareholder return in Asia

    Total return (price + dividends) since 2000

    Dividends are a significant piece of long-term total shareholder return in Asia

    Source: MSCI, Bloomberg, data as of 31 March 2022. Returns are based on MSCI indices. Asia pacific ex-Japan - MSCI AC Asia Pacific ex Japan; United States – MSCI USA; Europe – MSCI Europe; Japan – MSCI Japan; AC World – MSCI ACWI

    Investment involves risks. Past performance is not indicative of future performance. Any forecast, projection or target contained in this presentation is for information purposes only and is not guaranteed in any way. HSBC Asset Management accepts no liability for any failure to meet such forecasts, projections or targets. The views expressed above were held at the time of preparation and are subject to change without notice. The information provided does not constitute any investment recommendation or advice. For illustrative purposes only.

    HSBC Asia Equity High Dividend Investment Approach

    We believe adopting a bottom up stock selection approach and investing in specific high-quality companies with sound business models and the ability to generate sustainable cash flows, offers the best opportunity for our investors. Companies with scale and pricing power to protect their bottom line should fare relatively better than others in this environment.

    In terms of our stock selection preference, we primarily focuses on three types of companies. (i) leading cyclical/value companies with scale/low-cost advantage, (ii) defensive companies preferably with catalysts, and (iii) net cash positive growth companies, which we find in markets such as India, Indonesia, Korea and Taiwan.

    In summary we are focused on delivering higher income relative to the benchmark yield with potential capital growth for investors amidst market volatility.

    Resilient performance (1-year gross returns)

    (%)

    Resilient performance (1-year gross returns)

    Source: HSBC Asset Management, data as of 30 April 2022.

    Any performance information shown refers to the past and should not be seen as an indication of future returns.
    Performance are gross of fees and would be lowered after deduction of management and administrative fees. For illustrative purposes only.

    Morningstar ranking1as of end April 2022

    Morningstar ranking

    Source: Morningstar, data as of 30 April 2022
    Note: 1 Morningstar Category for the strategy: Asia-Pacific ex-Japan Equity Income


    Investment involves risks. Past performance is not indicative of future performance. Any forecast, projection or target contained in this presentation is for information purposes only and is not guaranteed in any way. HSBC Asset Management accepts no liability for any failure to meet such forecasts, projections or targets. The views expressed above were held at the time of preparation and are subject to change without notice. The information provided does not constitute any investment recommendation or advice. For illustrative purposes only.

     

    Key risks

    The value of investments and any income from them can go down as well as up and investors may not get back the amount originally invested.

    • Exchange rate risk: Investing in assets denominated in a currency other than that of the investor’s own currency perspective exposes the value of the investment to exchange rate fluctuations
    • Concentration risk: Funds with a narrow or concentrated investment strategy may experience higher risk and return fluctuations and lower liquidity than funds with a broader portfolio
    • Emerging market risk: Emerging economies typically exhibit higher levels of investment risk. Markets are not always well regulated or efficient and investments can be affected by reduced liquidity
    • Derivative risk: The value of derivative contracts is dependent upon the performance of an underlying asset. A small movement in the value of the underlying can cause a large movement in the value of the derivative. Unlike exchange traded derivatives, over-the-counter (OTC) derivatives have credit risk associated with the counterparty or institution facilitating the trade
    • Operational risk: The main risks are related to systems and process failures. Investment processes are overseen by independent risk functions which are subject to independent audit and supervised by regulators
    • Counterparty risk: The possibility that the counterparty to a transaction may be unwilling or unable to meet its obligations
    • Liquidity risk: Liquidity of securities may also fluctuate, resulting in situations where an investor may not be able to buy or sell the security in a timely manner at their preferred price range if the turnover volume were to drop significantly
    • Taxation risk: Investors should note that the proceeds from the sale of securities in some markets or the receipt of any dividends or other income may be or may become subject to tax, levies, duties or other fees or charges imposed by the authorities in that market
    • Custody risk: Investors should be aware that they are exposed to the risk of the custodian not being able to fully meet its obligation to restitute in a short time frame all of the assets of the Fund in the case of bankruptcy of the custodian
    • Sustainable investment policy risk: Sustainable Criteria are subjective and are subject to the Investment Adviser’s discretion. The use of Sustainable Criteria may affect the Fund’s investment performance

    For more detailed information on the risks associated, investors should refer to the prospectus.

    Important information

    The value of investments and the income from them can go down as well as up and investors may not get back the amount originally invested. Past performance contained in this document is not a reliable indicator of future performance whilst any forecasts, projections and simulations contained herein should not be relied upon as an indication of future results. Where overseas investments are held the rate of currency exchange may cause the value of such investments to go down as well as up. Investments in emerging markets are by their nature higher risk and potentially more volatile than those inherent in some established markets. Economies in Emerging Markets generally are heavily dependent upon international trade and, accordingly, have been and may continue to be affected adversely by trade barriers, exchange controls, managed adjustments in relative currency values and other protectionist measures imposed or negotiated by the countries with which they trade. These economies also have been and may continue to be affected adversely by economic conditions in the countries in which they trade. Mutual fund investments are subject to market risks, read all scheme related documents carefully.

    The contents of this document may not be reproduced or further distributed to any person or entity, whether in whole or in part, for any purpose. All non-authorised reproduction or use of this document will be the responsibility of the user and may lead to legal proceedings. The material contained in this document is for general information purposes only and does not constitute advice or a recommendation to buy or sell investments. Some of the statements contained in this document may be considered forward looking statements which provide current expectations or forecasts of future events. Such forward looking statements are not guarantees of future performance or events and involve risks and uncertainties. Actual results may differ materially from those described in such forward-looking statements as a result of various factors. We do not undertake any obligation to update the forward-looking statements contained herein, or to update the reasons why actual results could differ from those projected in the forward-looking statements. This document has no contractual value and is not by any means intended as a solicitation, nor a recommendation for the purchase or sale of any financial instrument in any jurisdiction in which such an offer is not lawful. The views and opinions expressed herein are those of HSBC Global Asset Management Global Investment Strategy Unit at the time of preparation, and are subject to change at any time. These views may not necessarily indicate current portfolios' composition. Individual portfolios managed by HSBC Global Asset Management primarily reflect individual clients' objectives, risk preferences, time horizon, and market liquidity.

    We accept no responsibility for the accuracy and/or completeness of any third party information obtained from sources we believe to be reliable but which have not been independently verified.

    This document has not been reviewed by the Securities and Futures Commission.

    HSBC Global Asset Management is the brand name for the asset management business of HSBC Group. The above communication is distributed in Hong Kong by HSBC Global Asset Management (Hong Kong) Limited.

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