What’s trending in China’s equity markets?
As the year begins, consider a 2021 list of China A-share ideas as you devise a plan for your investment portfolio?
Q1. What are your views on global dividend strategies2,3?
Risk-free rates and cash returns are likely to stay low for an extended period of time as we expect the recovery process from the acute respiratory pandemic’s economic fallout to be gradual.
Seeking low-risk options in income is sensible especially when the global economy has fallen into a recession. But global yields are now down to nearly zero, or negative yielding, coupled with the risk of defaults in some sectors such as high-yield bonds.
G4 central bank key policy rates4
Interest rates fell to similar levels a decade ago and we saw an increase in demand5 for equity income funds. Now, investors have been looking through the dismal economic data and near-term volatility to focus instead on new and revised monetary and fiscal measures that could provide some support to equity markets.
We believe an equity income strategy with a bias towards quality has the potential to optimise income opportunities in a recovering market.
Q2. Companies are announcing dividend cuts, how are you positioning your global dividend strategy6?
Understandably, company earnings currently are highly impacted by the economic fallout from the acute respiratory pandemic. Although the outbreak is showing signs of abating in some locations, some companies are reducing, or even cancelling, dividends to preserve liquidity within their own business.
We are focusing on long-term forecasting and structural change, and then translating our frameworks and forecasts into valuation rankings. This approach helps us to identify sustainable long-term cash flows and dividend growth.
This analysis allows us to see divergence between regions and sectors. For example, European companies are more likely to be more impacted than those in the US, where many sectors are in better shape with lower leverage than during the Global Financial Crisis.
Our analysts have a strong track record of avoiding investments in companies with dividend cuts. Over the last five years, our portfolio has experienced half of the dividend cuts versus the MSCI All Country World Index (Total Return Net)7 and delivered a higher yield8 at the same time.
Percentage of holdings reducing dividends per share9
The majority of our portfolio is in the US, and exceeding the MSCI All Country World Index (Total Return Net)7. As of May 2020, we do not have any exposure to European banks which has been largely impacted by regulatory scrutiny. Other sectors such as technology, consumer staples, healthcare, utilities and telecommunications have also been relatively insulated in this environment. Some of our existing US holdings have seen dividend increases since the beginning of 2020.
Despite uncertain times, active management can help avoid pitfalls given market’s concerns over dividend cuts.
Q3. What is the portfolio focus now?
Our Strategy has navigated through different market conditions. It’s important to stay focused on the quality of the holdings in the portfolio.
We actively avoid companies facing liquidity events that could cause lasting damage to their business. As such, we have very little exposure to balance-sheet leverage. We have reduced our positions in banks which are highly-likely to be impacted by prolonged low interest rates around the world.
We have a diversified10 exposure and we recently added into our holdings, some high-quality technology and semi-conductor companies that we believe have relatively attractive dividend outlook. We have also taken the opportunity to increase our exposure in some consumer staples companies which were previously overvalued.
Importantly, through the acute respiratory pandemic, our research team has highlighted a range of long term structural trends that could point to some winning opportunities. We construct our dividend portfolios by accessing the full range of preferred structural change themes, such as innovations in healthcare and digitalisation, to seek investment opportunities. Some of these structural shifts in the economy have accelerated as a result of the pandemic.
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The hunt for income is likely to intensify as risk-free rates and cash returns are likely to stay low for an extended period of time. An equity income strategy could help investors, based on their investment objectives and risk appetite, ride out the impact of a recessionary environment and optimise the potential opportunities in a recovering market.
Our Global Dividend Strategy2 seeks to deliver healthy yield premium over the MSCI All Country World Index (Total Return Net)7 through dynamic and flexible positioning to capture opportunities and exposure to structural trends.