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Newton’s Pidcock sees much Eastern promise


Jason Pidcock, manager of the Newton Asian Income Fund, looks at the growth of the dividend culture in Asia, and the fundamental trends driving Asian economies.

“The status of the West – as the creator of most of the world’s economic output and largest consumer of natural resources – is already under challenge from the East,” says Pidcock. “And a combination of demographic trends and changed patterns of saving and consumption is expected to contribute to this dramatic acceleration in the shift of global economic power eastwards.

“Economic gloom has pervaded Western economies of late,” he continues. Unsurprisingly, from a Western perspective, it is easy to overlook the two billion aspirational Asians who, thanks to hard work and thrift, are rapidly moving up the income curve. We believe that meaningful changes have taken place over the past decade, pointing to an unprecedented consumption boom in Asia,” he adds.

“In particular, population dynamics have a significant impact on the East’s ascendance,” Pidcock explains. “And notably, China has seen its dependency ratio plummet from 67% in 1980, to 39% today – an all-time low.”

The dependency ratio is defined as the ratio of the number of under 16s plus the number of over 60s, to the number of the working age population. A low dependency ratio can result in more money being spent on discretionary consumption and, importantly, implies that the size of the potential workforce is large, allowing for high production levels.

“Elsewhere, savings have always been high in Asia due to the absence of a meaningful social safety net, but this is slowly changing. In China, for instance, the government is embarking on implementing programmes for healthcare and social housing, thereby diminishing the precautionary need for individuals to save,” says Pidcock. Meanwhile, across South East Asia, we are also seeing the demise of the export-led growth model in favour of a more domestic-focused one. This has proved inevitable, as Western markets, the destination of a large proportion of exports, are still in a protracted recovery,” he adds.

“Asian companies have developed a culture of producing dividends and maintaining dividend policies, to some extent a legacy of the 1997 Asian currency crisis,” explains Pidcock. “Post-currency crisis, Asian companies increased their dividends once they were again on a firmer footing. It is a measure of the board’s confidence in the company’s financial status and future prospects when it is willing to release a significant amount of profits in the form of dividends to the shareholders rather than retain them in the business.

“In addition, analysts tend to look more favourably on companies that pay out dividends, helping to lower the cost of equity, thereby making the trend somewhat self perpetuating.” He continues, “Moreover, companies in Asia are maturing and there are many others that are coming to the market and listing for the first time. Both of these groups are more likely than in the past to have formal dividend policies to which they adhere.”

Meanwhile, inflation is ticking upwards in Asia and other emerging markets. Pidcock explains: “Capital inflows to emerging markets have the potential to be inflationary, a trend that could be exacerbated by the US administration’s benign neglect of the US dollar as it seeks to reflate its economy. In a bid to combat inflation, both China and South Korea have already raised interest rates. In our view, currencies are likely to trend higher, thus holding back inflationary pressures. Against this backdrop,” he concludes, “we have an underweight position to China and no exposure to Indonesia, where inflation is prevalent and tightening will inevitably occur. We also have an underweight position in the low-yielding Indian market.”

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