The Asia-Pacific region, encompassing developed and emerging markets, offers a compelling landscape for income investors with a total return mindset.
Yield and growth can go hand in hand
Asia is poised to drive global economic growth – accounting for more than half of the world’s gross domestic product (GDP) growth by 2025. This economic dynamism is driven by industrialisation, urbanisation, and a burgeoning middle class. For instance, despite recent slowdowns, China’s GDP growth remains significant compared to many Western economies. This growth translates into higher corporate earnings and, consequently, better dividend prospects for investors.
Imagine tapping into the immense potential of the region, led by economic powerhouses like China and India. That’s not all – the dynamic Southeast Asian economies, such as Indonesia and Thailand, are also growing rapidly (Chart 1).
Chart 1. Global GDP increasingly driven by Asia
Dividends make up close to half of total returns
Since 2001, Asia has been one of the best-performing markets in US total returns terms, with reinvested dividends being an important contributor [1]. Dividends make up a whopping ~50% of total returns in the region (Chart 2) [2].
Chart 2. Disintegrating total return index[3]
Today, more companies than ever in Asia are paying dividends, compared to even a decade ago, with nearly half of them yielding over 3% [2]. Companies that consistently pay and grow their dividends tend to outperform the broader Asian market over the long term, outshining bonds and other fixed-rate assets.
Income stocks, moreover, look cheap compared to the overall market. With economic uncertainties and recessionary pressures building, the market expects the US Federal Reserve to start cutting rates In September, which is already reflected in bond valuations. In such falling rate environments, stock prices tend to rise as companies improve their future earnings potential. So, we expect the market to refocus on dividends as a key driver of total returns (Chart 3).
Chart 3. Relative performance of dividend yield quintiles (20%)[3]
Dividends and share buybacks are rising
The region’s improving fundamentals are the cornerstone of its strong dividend sustainability. Data suggests that dividend and buyback sustainability is high as shareholder payouts are well covered by free cash-flow (Chart 4). High yield is in favour this year at the expense of bond proxies. Buybacks are rising in Asia, with a recent boost from China.
Chart 4. Dividend sustainability[3]
The earnings outlook is bright across Asia, as this optimism is materialising into upward revisions in consensus estimates that bode well for the rest of the year.
1 FactSet, Jefferies, January 2024.
2 CLSA, FactSet, December 2023.
3 MSCI All-Country Asia-Pacific ex-Japan Equities Index is an unmanaged index considered representative of Pacific region stock markets, excluding Japan. The index is computed using the net return, which withholds applicable taxes for non‐resident investors.
Important information
Risk factors you should consider prior to investing:
- The value of investments and the income from them can fall and investors may get back less than the amount invested.
- Past performance is not a guide to future results.
- Companies selected for illustrative purposes only to demonstrate the investment management style described herein and not as an investment recommendation or indication of future performance.
Other important information:
Issued by abrdn Fund Managers Limited, registered in England and Wales (740118) at 280 Bishopsgate, London EC2M 4AG, authorised and regulated by the Financial Conduct Authority in the UK.