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Asia Equity High Dividend Strategy

Seeking resilience amid 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 per cent between 2000 to end March 2022 and made up over 60 per cent of the total returns of Asian companies, based on MSCI universe

    Asia – Staying safe and resilience

    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 per cent, a figure that is way below United States and Japan, which are at 74 per cent and 42 per cent respectively, according to data complied by Jefferies as of 31 March 2022, according to data complied by Jefferies as of 31 March 2022.

    Graph

    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 per cent and 15 per cent, respectively, compared with a 10 per cent 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 per cent 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 per cent of the total return from 2000 to end of March this year, and returned 219 per cent, based on MSCI universe. Meanwhile, US dividends represented 44 per cent 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.

    Graph

    Source: MSCI, Bloomberg, data as of 31 March 2022. Returns are based on MSCI indices.
    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.

    Graph

    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.

     

    Morningstar ranking1 as of end April 2022

    Table

    Source: Morningstar (IC share class), 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.