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An update from our investment manager, Yoojeong Oh - 14 September 2020
The outlook for Asian corporates remains unclear as we tentatively begin to come out of lockdown restrictions, with some countries having more success than others. Increasing stimulus and the re-opening of economies across the region have been a positive but equity markets have been kept in check by worsening US-China relations, reinforcing our view that uncertainty is always just around the corner.
At a global level, access to financing and capital markets has been a challenge for corporates and for the resumption of economic growth, as a lack of cash flow can hinder a company's ability to pay their workers, invest in manufacturing and pay dividends. Another physical constraint has come from the postponement of annual general meetings (AGMs) to comply with social distancing measures, which means that shareholder voting to approve dividends has also been delayed. As a result, we have seen companies worldwide making the difficult decision to hold back dividends for this year in order to protect their balance sheets and weather this period of uncertainty.
Here in Asia, we continue to focus on balance sheet strength and cash flow generation as key measures of both quality and ability to pay dividends. It has been our long held belief that good quality companies that can emerge as winners through various market cycles are those that do not need to rely on external capital markets or short term borrowings. This can be seen in the fund characteristics where the underlying net debt to equity ratio of the fund is better than that of the benchmark, whilst returns on equity and assets are higher for the fund than the benchmark. Importantly, the dividend yield on the fund also continues to remain higher than the benchmark and we have enjoyed some positive dividend surprises from a few of our holdings as well this year.
What we have done during this period of volatility is to opportunistically buy more of the companies that we like that are cheaper today than they have been historically. We believe that although the disruption has been severe, the impact will likely be temporary and quality companies will emerge as winners longer term given their business strengths.
Whilst we expect markets to remain volatile in the near term, we are encouraged by the swift and decisive measures put in place by governments across the region to help consumers and stimulate the domestic economies. Looking ahead, we believe that the structural growth trends in Asia will remain intact and that current valuations present opportunities for long term investors such as ourselves. For now, fixed payout ratios in Asia point to a risk of dividend reduction given lower profitability from business disruption. However, our focus on robust balance sheets and resilient cash flows means that our holdings are better prepared to manage this dividend risk given lower gearing levels and larger cash balances, and look increasingly attractive to income investors. We have also built up a cash reserve which covers over two thirds of the annual dividend commitment which helps to provide a further cushion during these unprecedented times.
