Global markets have been roiled by fears that the US Federal Reserve may raise interest rates this month. However, some analysts still don’t expect any hike this year. Speaking to BTVi, Sat Duhra, fund manager for Asia Pacific equities at Henderson Global Investors, says there are a lot things that can go wrong. Henderson perceives Asia as a prospective region for dividend yielding companies even though there is volatility, he said. Excerpts:

Markets seemed to be spooked by fears of a Fed rate hike. It is quite unusual, as we were waiting for it. Yet, it is causing jitters. What’s your perception?

It is still not certain that we will have a rate hike this year. It’s being talked about, especially the long gap since the last hike. For us, as income strategists, that bodes quite well. Another is that the cash rates are still very low. When the Fed is talking about what they want to achieve with the rate hike, if we go a step back, it is all about financing conditions.

What we have seen in one timing in December was the impact on Fx market and currency credit spread. We are already in a tighter environment and want lot of pressure. There are a lot things that can go wrong — we have US elections coming up, a global deflation, environment in Japan and Europe, and risks from China.

You have some funds that make 6 per cent dividend yields. When dividend yields are high, in a way we look at markets as cheaper. Can there be a case for another 50-60 per cent appreciation in Asian markets, because usually, markets don’t stop until the yields get really small?

The interesting thing about Asia is that dividend payout ratios or the portion of dividends paid out of earnings is very low — it is only about 30-35 per cent. If you look at more developed markets, it is approaching 50 per cent or beyond.

The first step is that the number of companies paying dividend will increase. In China, 90 per cent of the companies pay dividends. In India, the percentage of companies paying good dividend is much lower. But in the next step, the payout ratios will increase. So we think, there is a lot of growth in Asia — Indonesia, India, Philippines.

When you talked about India, there are cultural nuances about sharing the funds with minority shareholders. There are three kinds of companies here. One set simply can’t pay their loans back to banks. The second set can actually pay — the IT companies — but don’t and prefer to put their surplus in money market mutual funds. The third set can pay but has other ambitions. How do you deal with these companies?

That’s an issue for income strategy in Asia. But we weigh our strategy in two parts — we have a component which have high yields.

So they have traditionally strong operational performance and paying strong dividends. But those are valuation upsides. The other half are those which offer dividend growth — stocks in India, Indonesia, and Thailand.

What do those stocks do? As you say many companies can be a value trap as they won’t pay dividends even in the long time horizon. So we have to be very careful with that.

I think there are two things that will happen in Asia. I think there is going to have growth in Asia because it is the fastest growing region globally.

And the second thing is that there is going to be volatility because these are less matured markets and we have higher retail components and lesser institutional shareholding. The conditions are really very good in Asia for dividends — the capex is coming up, financial leverage are coming off and free cash flow is positive and payout ratio is low.

Related Topics