Rebound in Asian dividends presents compelling investment opportunity

Asian equities are traditionally associated with growth, but high quality companies with strong dividend yields are moving to centre stage, says Halbis, the active management specialist of the HSBC Group.

For investors seeking good returns amid current market volatility, the current high yield of the Asian equity markets and the availability of companies able to pay regular dividends as a result of the quality of their earnings streams, means that investors should consider investing in Asian dividend-focussed strategies.

Asian equities are trading on yields that are higher than local interest rates for the first time since July 2001 (lasting until December 2005).The current yield on the MSCI Pacific Free ex Japan index is around 2.86%, which compares favourably to Hong Kong's three-month deposit rate of 1.96%.

Ayaz Ebrahim, chief executive officer for Halbis in Asia-Pacific, says a focus on companies with payout power arising from strong cashflow or improving capital management has traditionally led to outperformance in volatile markets. This is evidenced by past data which shows that during two bear market phases since 1999 (Q4 of 1999 to Q3 of 2001 and Q1 of 2002 to Q1 of 2003), dividend focussed strategies were able to produce positive returns.

Ebrahim says: "Looking ahead, growth will become more difficult to source. Therefore a focus on companies with relatively high yields and de-leveraging reflected through strong dividend growth provides a healthy level of return and a cushion against further falls."

As well as providing an income stream which can make an important contribution to total returns, dividend producing companies are typically well-managed, mature companies with proven income streams, rather than newer speculative companies which present higher risks.

Ebrahim adds: "We have traditionally associated dividend payouts with real earnings growth or high quality. That is because dividend policy indicates managements' belief in their firm's future prospects, improving corporate governance, and prudent capital management and spending. Investors should pay a premium for companies that consistently and predictably reward minority shareholders."

Meanwhile, there is evidence that companies in Asia are becoming far more aware of the need to reward shareholders. According to research commissioned by Halbis, 20% of companies in 2007 were paying steadily rising dividends, compared to 15% in 2002, while 33% of companies delivered rising dividends with some down years, compared to 23% in 2002. The number of companies paying no dividends fell from 9% to 7% over the period.

Halbis cites examples of dividend focused quality companies as Chunghwa Telecom in Taiwan (yielding 6.1%) and Singapore Airlines (yielding 4.1%).

A strategy that focuses on high quality, high dividend companies is available via the HSBC GIF Asia-Pacific ex Japan Equity High Dividend fund. This fund, which is part of HSBC's flagship Luxembourg-based SICAV range and is available for sale in more than 35 countries, targets outperformance of the MSCI AC Asia-Pacific ex Japan index by 2-3% per annum on a rolling five-year basis.

According to figures provided by Morningstar, over the past year (to 31 March 2008) the US$127 million fund has returned 16%, compared to the MSCI AC Asia Pacific ex Japan index of 9.73% and the Morningstar IM Equity Asia Pacific ex Japan sector average of 12.51%. Figures are quoted bid to bid in sterling terms.