Asia Triple Play for 2012: Income, Quality and Growth

by Carl Delfeld, Investment U Senior Analyst
Thursday, January 5, 2011: Issue #1680

When investors think of Asia, they usually think of growth investing.

When I was making my three-week swings through Tokyo, Hong Kong and Sydney to visit clients, the issue of dividends and income rarely came up at all.

Since then, the region has matured – representing more than a third of world GDP and world stock market value.

Asia is a big deal and is at the sweet spot of dividend yield, growth and quality.

But the challenge of volatility still lurks…

In 2011, India’s index lost a quarter of its value and China was down more than 20%. Only Indonesia and the Philippines managed to break above even this year.

This is why you need to move beyond just chasing growth and pursue a more balanced strategy.

Here are five reasons more balance will pay off for your Asia portfolio:

The dividend yield for the Asia-Pacific Stock Index is 50% higher than for the S&P 500 Index.
Southeast Asia has already been through its financial crisis in the late 1990s and is financially much stronger.
While cooling off a bit from its torrid pace of economic growth in 2010, Asia ex-Japan is still running at growth levels that put America and Europe to shame.
Asia local currency bonds now approach $1.3 trillion in value, offering you more opportunities for both income and a hedge on the U.S. dollar.
A balanced approach to investing in Asia is also a way to help tame that bad brother of high economic growth – volatility. It also guards against too much exposure to China.

Let’s look at a couple of these a bit more closely.

Dividends are important for two reasons…

First, just like in the U.S. stock markets, dividends are an important part of total returns.

Second, a company paying a steady and increasing dividend is more likely to be healthy. After all, dividends are paid in cash – not accounting gimmicks. You may have read about the 20 or so U.S.-listed Chinese companies that have run into real trouble – none of them paid dividends.

In 2010, companies in the MSCI Asia-Pacific Index paid out almost as many dividends as those in the S&P 500. And according to Matthews Funds, from 2002 to 2009, Asian companies grew dividends at a compound annual growth rate of 18%, compared to 10% for the S&P 500. Japan, China, Australia, Taiwan and Hong Kong are the biggest dividend payers in the region.

Southeast Asian countries and companies have already weathered a tough financial crisis and have learned lessons the hard way.

High debt, lax banking standards, huge trade deficits and overcapacity all lead to a severe Asia crisis in the late 1990s. Since then, leaders and executives have become more conservative and careful.

The below chart shows how, despite the global slowdown, these countries have managed to keep trade balances in the black.

A good place to start a more balanced Asia strategy is with the new Matthews Asia Strategic Income Fund (MAINX).

While it will invest in quality high-yield stocks, it takes advantage of the growth of Asia’s bond markets – one of the region’s most important and remarkable economic developments of the last decade.

Here’s a snapshot highlighting the variety of Asia’s bond markets.

Get going in 2012 by putting the Matthews Asia Strategic Income Fund at the core of your Asia strategy.

It will help lower volatility, capture growth, increase income and add some Asian and hard currency exposure to hedge against any declines in the U.S. dollar.

Good Investing,

Carl Delfeld

Article by Investment U