Asian companies with healthy balance sheets are in a strong position to weather the current market volatility, reward shareholders with higher dividend payments and share buybacks, and to look for growth opportunities via mergers and acquisitions, says John Ford, Asia Pacific Chief Investment Officer at Fidelity Worldwide Investment.
Mr Ford says Asia will emerge stronger from the current financial storm – at least relative to the developed world – as there is a heavy price to pay for all the bail outs, recapitalisations and fiscal stimuli that have taken place in the developed world.
Cash-rich companies in Asia, ex-Japan are sitting on around $US1 trillion in cash and are also looking to deploy these funds by finding quality merger and acquisition targets with attractive valuations.
Strong balance sheets and a reduction in capital expenditure are also behind the build-up of corporate cash reserves, he said. “People don’t tend to associate income with Asia, but we are seeing a growing trend of Asian corporates undertaking share buybacks, special dividend payments and even M&A activity,” Mr Ford said.
He said the dividend income growth story would continue for some time and that dividend payouts were not associated just with infrastructure stocks. “We are seeing airlines, heavy industrials, and Taiwanese technology, media and telecommunications companies paying healthy dividends, as well as what you would expect from typical defensive stocks such as banks.”
In contrast to the West, Asia is in good fiscal shape on the sovereign, household and corporate front. According to the International Monetary Fund, the G20 advanced economies had a debt-to-GDP ratio of more than 100% in 2010. This figure is projected to rise to 125% by 2015.
However, public debt levels are around one-third of GDP in Asia ex-Japan and are projected to decline to less than one-fifth by 2015.
On consumer spending, Asian households can afford to spend more given the very low levels of household debt.
Demographic factors and high savings rates will come down over time as the Asian population becomes increasingly middle class. This means that spending will accelerate in the future, translating into structurally higher levels of economic growth, particularly relative to those of developed world economies where households are necessarily focused on debt repayment.
On the corporate front, Asian companies with healthy balance sheets are in a strong position to weather the current market volatility and reward shareholders with higher dividend payments and share buybacks. The cash-payout ratios are set to increase further from 12% in 1998 to a prospective average of 32% estimated for 2011-12.
“This is significant because it shows us how strong corporate balance sheets are and how strong profits and cashflow are in Asian companies. It also shows a marked change in attitudes to good corporate governance and concern for shareholders’ interests,” Mr Ford said.
“This focus on shareholder value – coupled with robust balance sheets and healthy profits – means that over time an increasing proportion of total return from investing in Asian equities will come from dividend income and share buybacks rather than purely capital gain. In an environment so full of uncertainty, the well-covered yields in Asia are likely to become increasingly valued by investors,” he added.
These are long-term strategies and a reflection of Asian companies getting more sophisticated and wanting to provide more value to shareholders.
Despite the current market turmoil, Mr Ford said Asia was the key winner out of the situation. “Companies in Asia remain healthy. The fundamentals are in good shape and foreign investors will once again look to this part of the world for growth and further income.”
“The bull case for Asia is not just about growth – it is about better governance, better balance sheets, better profits and cashflows, and therefore, attractive yields. Yet, Asian valuations have often remained at a discount to developed markets despite all of this,” Mr Ford said.
