Asia Pacific Equities – A sweet spot for Income investors
Key Asia Pacific equity markets (barring India) have underperformed their developed market peers in 2021, due to the more intensive second wave which resulted in lockdowns that affected economic activity. Unexpected regulatory actions in China and concerns over Evergrande’s debt defaults also impacted the markets in the region. However, with vaccinations gathering pace in the region many economies are reopening which is expected to result in healthy growth rate in cash flows and dividends in 2022.
The region has several companies with exceptional franchises with pricing power and trading at significant discounts to intrinsic value. Asian companies in general have strong balance sheets and higher interest cover which help them to maintain their dividend pay-out ratios. One sector which is particularly interesting is Asian Banks which are trading at reasonable valuations (Price to Book (x)) with respect to their Return on Equity and contributing to around 25% of Asia Pacific dividend payouts. With increases in global commodity prices over the past 12 months, this is expected to support the dividend payouts from the Material sector, which accounts for around 11% of total Asia Pacific dividends. The MSCI Asia Pacific High Dividend yield index trades on a forward PE of 9.2 and a healthy dividend yield of 4.8%.
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