As Markets Rebound, Dividend Stocks Capture Gains While Buffering Volatility
As equities rise higher in Asia, dividend-paying stocks have captured attractive gains through a total return lens. Notably, many growth companies in Asia pay dividends, providing portfolio managers of total return strategies with a larger toolbox for capturing and compounding potential growth. Dividend streams may also help protect against market volatility.
In this Q&A, Matthews Asia portfolio managers Yu Zhang, CFA, and Joyce Li, CFA, examine how Asia's dividend-paying companies are holding up relative to those in Europe and the U.S. amid the global pandemic. They also discuss how recent advances in corporate governance can help investors capture growth opportunities with dividend-paying stocks.
Asian equities experienced a strong rebound in the third quarter of 2020. What was behind the gains?
Yu Zhang: Within the region, we saw China's economic recovery gain momentum, driven by effective control of the pandemic. Strength was extended beyond manufacturing sectors into domestic consumption areas. Year-over-year growth is now positive in areas such as retail sales, auto sales and property market sales. As a result, China's domestic equity market has been one of the best performers within Asia this year.
Elsewhere, a potent combination of continued monetary easing and fiscal support provided a much-needed backstop to economies and further enhanced investors' positive sentiment toward equities. During the quarter, we saw an interesting depreciation of the U.S. dollar against most Asian currencies. From the standpoint of emerging market equity performance, this was another strong tailwind. As a result, the MSCI All Country Asia Pacific Index not only fully recovered the losses it suffered in the COVID-19 market meltdown but finished the quarter with a positive year-to-date return.
Amid the COVID-19 pandemic, how are dividend payments holding up across Asia?
Joyce Li: Dividends are holding up better in Asia than other regions this year for a few reasons. First, the main cohort of dividend-cutting companies in Europe and the U.S. was comprised of financial and industrial companies that accepted government support to navigate the COVID-19 demand shock and were subsequently pressured to cut their payouts. Asia, however, hasn't faced that situation. Even in China, the government did not provide direct support for the banking system, so Chinese banks haven't felt any pressure to cut dividends.
Second, Asian companies have tended to run more conservative capital structures than their U.S. and European counterparts. In good times, some people may say these capital structures are less efficient. For example, 12 of Japan's 20 largest non-financial companies have net cash on the balance sheet. In comparison, all 20 the UK's largest non-financial companies have net borrowing. From this perspective, companies in Asia have more cushion to support dividend payouts during challenging times. Lastly, there has been relatively rapid containment of COVID-19 in Asia, giving corporates breathing room to recover from the shock, gradually resume normal operations and have confidence in supporting dividends.
Also, it's important to remember that Asian companies today have more earnings exposure to domestic consumption than five or 10 years ago. For these companies, growth is increasingly driven by domestic spending power and the rising middle class. These businesses have more resilient earnings than the broader market and we expect their dividends will also be strong.
How is the Matthews Asia Dividend Strategy positioned in terms of its balance between dividend payers and dividend growers?
Yu Zhang: Approximately 60% of the portfolio is classified as dividend growth stocks, with the remaining 40% as stable dividend payers. The portfolio currently is slightly geared toward dividend growth because market volatility has presented us with opportunities to pick up some growth stocks at relatively reasonable valuations. As the market has continued to rally, however, certain growth stocks have seen their multiples and valuations come back—so we are starting to be more active on the margin, adding higher-yielding stocks with cheaper multiples, including some financials.
Where are you finding attractive sources of dividends in Asia today?
Joyce Li: In Asia, opportunities in dividend investing have been expanding in recent years as companies have prioritized corporate governance and increased dividend payouts. Japanese companies, for example, have delivered the best dividend growth among developed markets over the past five years. As of November 12, 2020, the dividend yield in Japan was 2.2% (as measured by the Tokyo Stock Price Index) versus 1.7% in the U.S. (as measured by the S&P 500 Index). Opportunities for dividend investing in China are also expanding, with 85% of companies in the MSCI China Index currently paying dividends.
Within the broader Asia Pacific universe, we're finding interesting opportunities in many areas, particularly businesses that are oriented toward domestic consumption, such as digitalized retail and education, as well as modern-day infrastructure companies like data centers and 5G testing equipment companies. The good news is that a focus on dividends does not need to constrain the investable universe in Asia. In fact, our universe is quite large, thanks to the deep-rooted dividend-paying culture in Asia. Many Asian companies have controlling shareholders, and these shareholders with “skin in the game,” prefer disciplined capital allocation policies with dividends. This creates straightforward alignment between listed companies in Asia and minority shareholders like us.
What is your market outlook for the remainder of 2020 and beyond?
Yu Zhang: Southeast Asia and India are still struggling to better control the COVID-19 pandemic and their economic recoveries are still a bit illusive. Based on our experience, however, the uncertainty in Southeast Asia and India could potentially provide interesting long-term investment opportunities. Our focus is on finding structural businesses where we think core strengths will remain intact, but where the near-term uncertainty—whether it's virus-related or driven by political uncertainty—has brought valuations to a level that opens an interesting window of opportunity.
In terms of an earnings recovery, we are seeing companies in Asia starting to turn more positive. In addition, sell-side consensus earnings estimates for Asian companies have been on a positive revision trend. We think Asian earnings will turn out to be slightly more resilient than initial worries and we think the dividend outlook for Asian companies could turn out to be even stronger than earnings.
The views and information discussed in this report are as of the date of publication, are subject to change and may not reflect current views. The views expressed represent an assessment of market conditions at a specific point in time, are opinions only and should not be relied upon as investment advice regarding a particular investment or markets in general. Such information does not constitute a recommendation to buy or sell specific securities or investment vehicles. Investment involves risk. Investing in international and emerging markets may involve additional risks, such as social and political instability, market illiquidity, exchange-rate fluctuations, a high level of volatility and limited regulation. Past performance is no guarantee of future results. The information contained herein has been derived from sources believed to be reliable and accurate at the time of compilation, but no representation or warranty (express or implied) is made as to the accuracy or completeness of any of this information. Matthews Asia and its affiliates do not accept any liability for losses either direct or consequential caused by the use of this information.
