This is particularly true of core government bonds, but it has also spilt over into the corporate credit markets. Although equities still have a significant yield advantage over government bonds and cash there are some sectors where equity yield is becoming expensive as investors risk overlooking valuations in the quest for distribution. There are areas of the Asian equity markets that exhibit this tendency: companies within the consumer staple and utility sectors trading at multi-year highs despite a fairly pedestrian earnings outlook.
We take the view that one should not overpay for income and our strategy is to try and incorporate the yield-payers of the future into the portfolio.
While we believe that dividend-paying companies are a good defensive tool against turmoil in the markets, our focus remains on sustainably high-yielding names that have valuation support.
We also dedicate a proportion of the portfolio to these companies that we believe will be the high-yielding names of the future.
This should allow for superior dividend growth going forward and also provide greater capital upside should market sentiment turn more positive.
The technical backdrop has not changed in Asia. Equity valuations are still not excessive; Asian markets currently trade below their average 10-year price-to-earnings (PE) ratios at the lower end of their historical ranges and look attractive relative to other global equity markets – especially local and global bonds.
Although earnings numbers have been revised down in recent months, especially in the more cyclical areas, cash-flow generation has remained healthy, while gearing levels are low.
Despite a slowdown in dividend growth, payouts continue to be a growing part of total returns in Asia. Back in 1998, less than 60 per cent of stocks in the region paid dividends; that figure had risen to around 80 per cent by 2011.
Importantly, following the changes at the company level in recent years, which are reflected in lower debt and higher margins, Asian companies have the ability to continue to generate strong cash-flows.
The extra cash, we believe, will be put towards increasing dividend payments. Sustainable dividend yield is in plentiful supply across the region.
A good example would be a look at dividends paid in 2008 at the height of the financial crisis. In that year, those Asian markets less exposed to the global cyclical cycle had increasing levels of dividend payment.
And yet, average payout ratios are presently at the low end of their historical range in Asia; this will have to rise given the arguments above.
On the economic front, the western world’s uncertain growth outlook contrasts with that of the relatively robust Asian economies.
While GDP growth has slowed, mainly from export weakness but also from restrictive government policy, underlying trends remain healthy in Asia, especially in those areas related to consumer demand.
More importantly, inflationary pressure has abated, which has allowed interest rates to be cut in China, Australia and Korea, and overall fiscal and monetary policy to be much more accommodative in the region.
The measures to contain property price appreciation have been relaxed and infrastructure projects, which had been put on hold due to fears of overheating, have been restarted.
That is not to say that Asia is completely immune to the woes of the West. Asian economies may display an element of decoupling from their western peers but the same cannot be said for the stock markets.
In the last 12 months, heightened economic and political uncertainty resonating from Europe and weaker-than-expected growth from the US have been the cause of much weakness in Asia, leaving markets range-bound, weighed down by a moribund growth outlook and political uncertainty in both Europe and the US.
The good news, however, is that investment opportunities still abound in the region. Finding them requires a selective philosophy; one that looks to markets with less susceptibility to global economic growth and that are more focused on domestic names, and then combines it with a bottom-up approach to find stocks that have a real investment appeal rather than just a high yield.
This means focusing on names that have a value bias – that is they are fundamentally undervalued, providing room for capital growth – and at the same time are expected to grow their dividends in the years to come.
There are plenty of income opportunities: 60 per cent of Asian companies’ shares currently yield more than 10-year US Treasury bonds, and 39 per cent yield more than their 10-year local bonds.
The proviso here is that while we wait for the decoupling of Asian stock markets from the West, likely a protracted process, one has to take a medium- to long-term view on investments.
We remain positive on the outlook for Asian equities in the medium- to long-term but expect volatility to continue while Europe debates its future and the US struggles to maintain an economic recovery.
We believe that Asian fundamentals remain intact and will use any opportunity posed by global uncertainty to acquire solid Asian franchises at attractive prices given their resilient corporate balance sheets, earnings and dividend yields.
The domestic bias also remains, focused on businesses within the financial, property, consumer discretionary and telecommunication sectors and away from export-oriented names.
Michael Kerley is manager of the Henderson Asian Dividend Income and Henderson Horizon Asian Dividend Income funds. The views expressed here are his own.