On a recent Hong Kong trip, Horrocks, who is also the co-manager of the firm’s Asia dividend fund, discussed with FSA the dividend strategy in Asia as well as China concerns.
Are dividend payouts a new concept in Asia?
Certainly in Korea and Japan [dividends] are a new concept. There are two reasons you wouldn’t pay a dividend. One, you don’t have the cash. The other is you do have it but want to reinvest for growth or just don’t care about shareholders. Generally speaking, in Korea and Japan, [management] didn’t think about companies being run for shareholders but for stakeholders – employees, government, almost everyone except the shareholder. So why pay a dividend?
We’ve seen that attitude just start to change at the margins. In India, on average, you didn’t find some companies paying a dividend or not paying big dividends, due to scarcity of capital. In China it’s different. It’s easy to find dividends, even state-owned enterprises pay big dividends.
[Overall], the entire pool of dividends in Asia is roughly comparable to what you get in the US as a whole. But the average growth in the Asia pool is much faster.
You’re looking for sustainable dividend growth. How do you get a sense that a company can continue to grow dividends?
You ask [management] a lot of questions. Do you have a dividend policy? Is it written into the articles of the company? Do you think about payout ratio or an absolute level of dividend? Do you guys get dividends as well – are you incentivized because you are shareholders? Is there a family ownership behind professional management that has long since moved away from running the business but still extract value in the form of dividends? There are a lot of questions to ask just on dividend policy. We also want to know what the long-term plan is, and we want to talk to their clients and suppliers.
Your position is that investors shouldn’t have strong concerns about tariffs on Chinese goods, even a possible $200bn in new tariffs?
Yes. The tariffs are not significant because it’s a small part of China’s GDP. We’re talking about a $12trn economy. Tariffs also do not have as big an impact on some companies as headlines suggest. Market reaction can be overdone. How tariffs affect individual companies can be incredibly complex. Companies can relocate their production [to avoid tariffs]. We’ve seen it with Chinese companies relocating labour-intensive manufacturing [offshore]. Supply chains also move.
A third reason not to get too hung up on headlines is the massive attempt China is making to build out infrastructure west into Europe and to the east coast of Africa. The One Belt, One Road project is China’s attempt to reach out to large young populations to its west and bring them into the global economy. The effects of that on trade will happen over time but will be of far greater magnitude than tariffs.
What is general investor reaction to China outside Asia?
It differs between investors and across geographies. Generally people are comfortable with China as a wealthy economy, a source of consumption. Move to Latin America, [investors] are not put off by the emerging markets label because they’re also saddled with the same kind of label. They see China as a natural complement to their own economies. They see it as a huge consumer market. In Europe, the idea of the EM category does have more of an impact. The European investor is probably more comfortable with a separate Asia allocation that doesn’t have EM tacked onto it. They also have a home bias, but generally people will take a strategic long-term view. Then in the US, [investors] are the least comfortable with the idea of China.
The US client has this whole EM framework they work in. It’s more or less a tactical allocation and depends on the direction of dollar. They are also comfortable with their home market at the moment. The idea of a battle for global supremacy between the US and China psychologically leads to unfamiliarity and outright antagonism toward China. That’s true until you get to the west coast of the US, with the investment that has come from Chinese Americans into the tech industry.
The US says tariffs are imposed because China has protected markets, forced tech transfer, intellectual property violations. Is it based on fact?
It’s certainly not empty rhetoric. Copyright and IP protection is a real issue. Anyone who has lived in China knows there’s a big market for fake goods. It’s mainly consumer goods, but when it gets into areas of technology that could be used in national defense, that’s a real issue. But I’m not sure this isn’t something countries have been doing to each other for decades. Initiating a trade war is a blunt instrument for addressing that.
I fundamentally disagree with the proposition that America’s economic and political goals are contradictory to China’s. Free trade enriches each side. A lot of the rhetoric that surrounds the China-US relationship is overblown.
What do you see as the big risk in China?
What most concerns me will sound like I am going off on a tangent, but I’m not. It’s the legal framework around what the Chinese government does. How willing is the Chinese government to allow the free market to flourish, how willing is it to govern based on written law and an independent judiciary? [Versus] the other idea in China which is akin to centralized edict. The pendulum swings between these two.