2020 may have been a fallow year for income investors overall, but much depended on investors’ sector and geographic exposure. Sectors such as pharmaceuticals had no trouble sustaining and even growing payouts to investors. At the same time, companies in specific regions, notably Asia, saw fewer cuts to payouts. Investors with sufficient diversity have managed to side-step the worst of the falls.
Martin Connaghan, Investment Director of Global Equities, points out that payouts across Asia were flat for the full year 2020, compared to falls of over 40% in the UK. Chinese companies even managed to grow their dividends in aggregate. As the world starts to recover from Covid-19, there are reasons to believe this strength can continue.
It is not news to say that until the latter part of 2020, investors were very narrow in their focus. While markets recovered from their major wobble last March, they were led by a handful of high growth technology stocks in the US and China. The type of mature, solid businesses that make up an income portfolio were on the wrong side of trade and generally neglected by investors, even though earnings and dividends proved resilient during the crisis.
This has left many interesting income ideas trading below their long-term trend valuations, particularly in niche areas such as frontier markets. Andrew Lister, Head of Closed Ended Fund Strategies comments: “This is a contrarian entry point. At the moment, we expect a recovery in income from emerging markets and we see plenty of areas where income is extremely attractively valued today.”
Yoojeong Oh, Investment Director of Asian Equities, sees the potential for earnings recovery among many Asian companies: “We have seen earnings pick up quite markedly already this year, that bodes well for dividend announcements. It goes without saying that earnings growth is positive for dividend growth, so we see better prospects for 2021.”
There is also an important consideration on debt. Excessively high corporate debt acts not only as a break on growth, but also on dividend payments. The crisis has also shown how debt can leave companies vulnerable. Yoojeong points out that Asian companies generally have more balance sheet strength than their Western peers: “Leverage on balance sheets for Asia is generally much better controlled and maintained than in the rest of the world. As such, Asian companies are in a better position to keep paying dividends, while also investing in their business for growth.”
Martin says: “We continue to make full use of the global remit and not to be constrained. We invest in any business that meets our criteria, regardless of where it is.” He believes relative valuations in Latin America and Asia are far more attractive today.
Less constrained by debt and operating against a backdrop of higher economic growth, companies in Asia and emerging markets are often growing faster than elsewhere. This is particularly true when investors are looking through an income lens. Asian and emerging markets have brought new companies and sectors for income investors. Andrew says: “Twenty years ago, global income mandates were quite heavily skewed to oil and gas, materials, utilities and telcos. These were cyclical and ex-growth in many cases. We’ve seen that change.”
However, many investors may rightly ask when this is likely to change. What will prompt valuations to adjust? To some extent, the process has started already. As economic recovery has seemed possible, there has been a nascent recovery in some ‘value’ and economically-sensitive parts of the market. Equally, many of the usual income options for investors – particularly higher grade government and corporate bonds – look very challenged. The income available is negligible or non-existent. Eventually, we believe, this will drive investors to those parts of the market that offer the most compelling value.
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