The case for dividend investing in Asia is getting stronger amid heightened market volatility and rising inflation.
In short, Fidelity believes that a focus on attractively-valued stable businesses with strong balance sheets, resilient earnings and cash flows should offer an element of defensiveness.
“Market sell-offs are always a good opportunity for stock-pickers, and we are seeing attractive ideas emerge in some high-quality franchises across the region, particularly Asean and China,” said Jochen Breuer, portfolio manager of the $352m Fidelity Asia Pacific Dividend Fund.
In line with this, the firm expects continued dividend growth in its portfolio, while valuations are increasingly supportive.
Making quality count
Against a challenging backdrop for equity markets, Fidelity has maintained a strong quality bias, favouring predominantly defensive business models with robust balance sheets at attractive valuations.
The aim, explained Breuer, is to provide a cross-cycle outperformance, a resilient and growing income stream and long-term capital growth, with lower risk characteristics than the market.
“Given the portfolio’s defensive characteristics, it has performed as expected year-to-date and has beaten the benchmark amid increased market volatility,” he added.
Stocks within Asean look especially attractive as the region emerges from its Covid-related lockdowns and closed borders. For example, as vaccination rates rapidly increase, Thailand and Indonesia are reopening, spurring improved consumer confidence.
Indonesia is also notable since it stands to benefit from the increase in soft commodity prices brought on by the Russia-Ukraine conflict, said Breuer. “This will support the economy and corporate lending cycle in Indonesia.”
Fidelity also considers China as worth highlighting. “We have seen a huge amount of volatility in China and Hong Kong, with these markets having de-rated significantly. We have used this weakness to add to existing holdings with regulated pricing,” he added.
By contrast, Fidelity sees India as expensive. While the firm mostly owns defensive names, it has been taking some money off the table.
Relying on resilient dividends
The market environment has also made it more important for investors to consider their diversification against growth-oriented strategies.
This is possible, for example, by being underexposed to some of the more richly valued, long duration growth parts of the market – such as technology – which may be subject to deratings in the face of further rising rates and weaker economic activity.
“As we head into a potentially stagflationary environment, quality dividend stocks should prove relatively resilient,” added Breuer.
“As earnings growth in the broader market comes under pressure, following very strong growth in 2021, resilient compounding dividends may become a more important component of total returns.”
