Asia - the less risky choice for growth and income

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There are good reasons to be concerned about the stock markets of the Western developed economies, and for investors to be much more pro-active than has been the practice for more than a couple of decades.

But what about Asia? Here the long term uptrend in markets is still evident. Where those of the Western economies have been dull over the last decade, and remain below the decade peaks of November 2007, the Asia stock markets have broken up into new high ground.

For example, looking back 10 years, the UK stock market (represented by the FTSE All Share Index) is up 18% with income re-invested. In sharp contrast, even the average fund investing into Asia (excl. Japan) is up 121%. And the large and successful, but far from racy, funds from Aberdeen and First State are up 236% and 287% respectively.

enjoying healthy ebb and flow

Can this continue? First and foremost, while the most developed Western economies (plus Japan) are entering prolonged periods of austerity, the Asian economies have the opposite problem, taking the steam out of theirs. This is part of the healthy ebb and flow of economies which remain in good shape; sound financial systems, cash accumulating at companies, consumers not over-indebted.

Consumers are key to economies growing, particularly the burgeoning middle classes. The table below illustrates the potential across a range of consumer goods.

 Asian consumers vs rest of world

Demographic trends also help. As we have endlessly pointed out previously, India contains 25% of the globes population aged under 25. If the greater part of these can be put to work the potential is extraordinary.

We should not overlook the fact that demographics will be working against China in the years ahead (in particular due to the one child policy). On the other hand the Chinese, along with much of Asia, have a very high savings rate, one key reason for which is lack of welfare systems and job security. As reforms slowly change this lack of security, consumers will loosen their purse strings - glance at the table again and observe the lack of mobile phones, cars and computers compared to the developed world.

Even so, as Aberdeen’s veteran Hugh Young points out, there will be no overnight bonanza for Asian investors, and he also poses the question “should risk averse investors stay on the sidelines until events settle?”, and this is worth exploring, depending on whether you already hold Asian funds or are thinking of buying them.

In recent months although we have recommended reducing portfolio risk, we have been inclined to retain our Asian holdings, in particular the more conservatively invested growth funds (First State and Aberdeen) and income funds (Newton Asian Income). As we mentioned earlier, this is because we believe the Asian markets are in a long term uptrend, so we can ride out any short term corrections.

We are also conscious that we can be wrong! If we are being too cautious reducing risk across portfolios, and markets bounce sharply, portfolios will underperform. By retaining some Asian funds it will ensure portfolios have some bounceability.

Similarly if (when?) another major stimulus package is introduced across the US and Europe, our continuing Asian exposure will capture some of the initial response as global stock markets bounce.

good time to buy?

It is more finely balanced if you are looking for an opportunity to buy.

To take an extreme example, even if you had bought at the peak of the UK stock market in 1987, by 1999 you would still have more than trebled your money with income reinvested.

Similarly, if Asia remains in a long term uptrend, as we believe, you could buy now and ignore the almost certain turbulence in the months ahead.

To be sure, the Asian markets are not expensive, being approximately in the middle of their historical range. The PE (price earnings) ratio is 16 this year, falling to 14 next year. Historically the markets have been very cheap with the markets around 10, and expensive once over 20.

However, although domestic consumers will become increasingly important in the years to come, exports are still vital, so the prospect of weaker global economic growth will hit Asia.

So if you are looking to buy, it will probably do no harm tempering your enthusiasm, perhaps dripping your intended lump sum investment over 12 months.

income attractions grow

If it is income you are after, Asia came through the test of the dubiously named “Great Recession” very well.

Earlier last decade our fear was that, while we could see the attractions of a growing dividend culture in Asia, the resolve of company managements had not yet been tested. We wondered whether payouts would be held when the first recession occurred, even though the temptation would be to cut if profits were falling.

Newton fund manager Jason Pidcock says “During the financial crisis Asian companies have generally maintained dividends despite lower earnings”.

This enabled Newton Asian Income to grow its income payout by 7% in 2009 (many UK funds cut by 20-30%), and separate research suggests Asian dividends will grow by 10%+ in 2010. The current yield for this fund is 4.9%

Earlier this year we said that one of the big surprises by the end of this decade will be the extent to which UK income-seekers, primarily pensioners, will have to rely on income from Asian companies. Three Asian income funds already feature on page 45, and a long standing Asian growth fund has been recently relaunched with an income objective, Henderson Asian Dividend Income, with an estimated yield of 4.3%.

why less risky?

The Asian economies benefit from stable banking systems, limited sovereign debt, limited consumer debt, growing middle classes, and positive demographics. An impressive list! And if you test developed Western economies with the same list, they fail miserably.

It is these features which will underpin growing earnings, push share prices higher, and will enable dividend payouts to grow year after year.

(Taken from TopFunds Guide July 2010)

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