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JPM AM: China equity income theme finally takes off

As GDP growth slows, previously tight Chinese companies are starting to pay or increase dividends, according to Lilian Leung, portfolio manager at JP Morgan Asset Management.

“Investors had been chasing growth in Chinese stocks, thus the income theme has not been effective,” said Leung, who manages the equity portion of the JP Morgan China Income Fund, at a briefing in Hong Kong.

“But now as the economy slows, we see the high dividend strategy become more efficient.”

The fund, managed by a team of three, can invest 40-80% in equities and 20-60% in bonds. Estimated yield for offshore equities in the portfolio is 4-5%, while yield of onshore stocks and fixed income is around 4% a year.

In the A-share market, only roughly 700 out of 2000 listed stocks are paying dividends. Since 2010, the average dividend payout ratio stood at around 32-34% of a company’s net earnings.

When companies begin declaring dividends they usually start at a lower ratio between 10-15%, she noted, which pushes down the average payout ratio of A-shares.

“More companies are aware of setting a dividend policy to look after shareholder interests. The government also encourages listed companies to issue more cash dividends after the market crash last summer.”

High dividend banks

She also observed improving operating cash flow for Chinese companies in 2015, which is likely to support higher dividends. “The ideal case is companies with 50-70% of dividend payout, with strong operating cashflow.”

In the portfolio, Chinese banks offer higher-than-average yield at around 5-6%, she said.

“However, some industrial stocks have a low payout ratio at 15-20%, with potential earnings growth also at 15-20% a year, plus improving operating cash flow. We expect the dividend growth will follow.”

Except for banks, most companies in her fund’s portfolio have an earnings growth forecast at around 15-20% a year, she noted. The overall dividend payout as a part of net earnings is also expected to grow around 1 percentage point a year.

On the demand side, the long-term interest rate in China is expected to head lower. Traditional wealth management products, such as money market funds that have been very popular among domestic investors, also offer less steady and attractive returns than they have in the past few years, she noted.

Alibaba’s money market fund Yuebao, for instance, had its annualised seven-day yield tumble from the peak of 6.7% in 2014, to 2.3% as of yesterday.

“Income investing has been quite popular in other markets,” Leung said. “For China, it’s just a start and we expect a structural change.”


The fund outperformed the Asia Pacific mixed asset fund category in US dollar terms over the past five years, according to FE Analytics. JP Morgan AM launched a Hong Kong dollar share class of the fund earlier this month.



Part of the Mark Allen Group.