Asian Dividend Income: cautiously optimistic in 2017

What lessons have you learned from 2016?

2016 has been an interesting but sometimes frustrating year in which global events and style preference have dominated returns. The direction of US interest rates and the shape of the yield curve, together with unique political challenges have impacted flows to and from the region almost irrespective of underlying fundamentals. It has been a year to remember that picking the best stocks in the region which match our objectives will ultimately be rewarding for investors.

What are the key themes likely to shape the markets in which you invest in 2017?

Global events will likely continue to dominate returns in 2017. A new president in the US together with key elections in France and Germany will add volatility while debates about monetary and fiscal policy will shape the backdrop for liquidity and interest rates.

The improving economic outlook for Asia and China in particular will be closely watched while the recovery in earnings is key to sustaining Asia’s outperformance of western markets. We believe the dividend theme will continue to be attractive as real interest rates remain high relative to the rest of the world, suggesting that monetary tightening is unlikely in the short term. With Asian bond yields at record lows, dividend yields remain attractive relative to bonds and cash.

What are your highest conviction positions moving towards the new year?

Our portfolios do not specifically prioritise any individual holdings although there are some companies that have strong catalysts in 2017. Samsung Electronics is not typically a yield stock but there are reasons to believe that this may change over the next twelve months. Corporate restructuring involving the inclusion of heir apparent Jae Yong Lee to the Samsung board could be the catalyst for more shareholder-friendly policies going forward. Combining this with a business that is seeing positive momentum especially in memory and display results is an interesting dividend growth story for 2017. Another position of note is Macquarie Bank, which is uniquely positioned to benefit from increased global infrastructure spending through its class leading fund business. Rather than investing in commodity stocks, which will benefit from this trend but suffer from oversupply, we prefer the funders of such projects, which is where Macquarie excels.

What should investors expect from your asset class and your portfolio(s) going forward?

We remain cautiously optimistic on Asia Pacific markets in 2017 but accept that global themes will continue to dictate market direction in the short term. Valuations are currently attractive, especially relative to global peers, earnings are showing improvement which could help reduce the valuation discount, while economic growth around the region has stabilised with reasons to believe that this will continue into 2017. The most compelling reason for investing in Asia Pacific remains the potential for dividend growth. Asian companies are cash rich and still in the early stages of adopting a dividend culture. Dividend payout ratios are at record lows and as shareholder-friendly reforms continue to gain traction, we believe increasingly more excess cash will be used to reward shareholders.