Income is likely to remain a key focus for investors in 2023 as well. Whether it’s for retirement, raising children, or simply wanting a tangible return, many cite income as the primary goal they want to achieve when investing.
With interest rates at their highest level in years, we can expect a correspondingly high payout from an income strategy. Therefore, investors looking for higher income can consider the merits of dividend stocks and bond coupons, particularly Asian assets that rank among the highest yielding in the world.
Is Now a Good Time to Invest in Asian Income?
The Asian income strategy denotes an investment approach that focuses on generating income from assets in the Asian market. Income aside, Asia Pacific (excluding Japan) continues to be a dynamic growth region, benefiting from strong domestic consumption, manufacturing and export activities that impact global demand for high-tech goods and resources.
Asia’s long-term structural growth remains intact, supported by favorable demographics, a growing middle class and sophisticated manufacturing and technology capabilities. In addition, inflationary pressures are less pronounced in Asia compared to the West.
South and Southeast Asia are more resilient due to stable underlying trends in their domestic economies, while North Asia has a strong global trade base, which lends itself to continued innovation.
After a strict zero-Covid stance in China for more than two years, the recent policy easing is a tailwind for Asia’s growth. While the economy will be adversely affected by rising infection numbers in the short term, this paves the way for a subsequent recovery, most likely in the second half of 2023.
Asian countries that have trade ties with China will of course benefit from its recovery.
Dividend Yields and Fixed Rate Coupons
The pendulum between growth and income has swung firmly into the latter camp since 2022, after many years of growth outperforming. The first chart has given investors a very clear picture of the MSCI AC Asia Pacific (ex Japan) High Dividend Yield Index versus the Growth Index since 2005.
Given the current uncertain global environment, an allocation to Asian companies that pay steady and growing dividends and coupons is a compelling investment opportunity. (See Chart 1.)
Additionally, yields on bonds and other fixed income securities in Asia are higher compared to other regions (as seen in the first chart), making it an attractive option for income investors.
Diversification through an Asian multi-asset income strategy gives access to a wide range of asset classes, including dividends from equities and coupons from bonds, which is key to reducing risk. In addition, in times of market volatility, income strategies offer better stability while delivering attractive levels of returns. (See Diagram 2.)
Attractive Asian market valuations, China recovery
Alongside global financial markets, Asian stocks and bonds endured a challenging 2022, impacted by a host of global issues, including rising inflation, interest rates and the Ukraine-Russia war, as well as China’s tough Covid policies and real estate woes.
However, since 2021, the Asian region has also been hit by the Chinese authorities’ strict regulation of industries such as tutoring, internet gaming, casinos and real estate, all of which fell under the broad banner of “shared prosperity”. As can be seen from the other charts, valuations for both Asian equities and corporate bonds have corrected to attractive levels compared to historical averages and developed market benchmarks. (See Diagram 3.)
We expect China’s economy to recover in 2023, with GDP growth accelerating to 5% from 3% in 2022. The swift lifting of Covid restrictions should lead to a rebound in economic activity. The service sector in particular should benefit from this, which could lead to the economy growing faster than our current forecast.
China’s recovery not only gives a boost to the Asian region but to the entire world. Nonetheless, the proximity and close trade ties with the largest economy in the neighborhood undoubtedly bode well for all economic activity in the region.
Market outlook for 2023
Overall, we believe many of the concerns from 2022 have now peaked, but we’re not over the hill yet. There are ongoing concerns about interest rates, inflation and geopolitical tensions.
Nevertheless, we see many opportunities in the Asia-Pacific region. Catalysts for good performance of Asian assets include: (1) positive moves by Chinese policy on zero-Covid and real estate market measures; (2) the less aggressive inflation regime in Asian countries, which are thus better positioned to exit the tightening cycle before developed markets; and (3) attractive financial market valuations relative to historical and global peers.
In particular, we believe that Asian corporate bonds play a large role in an Asian income strategy. In addition to the diversification benefits, a higher yield offers an attractive carry compared to other asset classes. Regarding Asian equities, distressed valuations, improving market sentiment and expectations of a recovery in China in 2023 should support this asset class in the medium term.
As always, selectivity remains key. We continue to favor segments of the Chinese market that are benefiting from the easing of Covid restrictions and companies that are closely aligned with the government’s strategic priorities.
We also see opportunities within the financial sector across the region, benefiting from higher interest rates and offering attractive valuations and yields. In addition, Australia’s defensive profile, long-term economic growth in India and global industry leaders in South Korea and Taiwan will all play key roles in 2023 and beyond. Given the current conditions, a diversified and risk management approach remains warranted to steer the upcoming recovery. An Asian earnings strategy that focuses on strong dividend names and quality companies with growth potential will help create a more stable return path.
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