What a year. In spite of everything, the S&P 500 remains up around 7.5% in 2020 (excluding dividends). Imagine making that prediction back in mid-to-late March. Even after this incredible rally, I’m not sure the market is all together that expensive. I know that may sound strange, but forward earnings estimates for 2022 were at circa $190 for the S&P 500 last time I checked. Call that equal to a forward price-earnings (“PE”) ratio of around 18.5. Is that really so expensive when corporate bond yields trade around the 3.4% mark? I’m not so sure.
That brings me to Asian equities. If you can make a decent case for the S&P 500 right now, then Asian and emerging markets look even better. Check out something like the iShares China Large Cap UCITS ETF as just one example. This exchange traded fund basically tracks fifty of the largest Chinese stocks trading on the Hong Kong Stock Exchange. Now, it is well known that China has been responsible for a big chunk of global growth in recent times. The country’s GDP has grown at a 6.5% per annum average clip over the past five years or so. Despite that, the ETF’s current PE ratio clocks in at 11.8 according to iShares, equal to an 8.5% earnings yield. I’d wager the fund will have a very good decade ahead of it in terms of total return.
More conservative-minded investors might prefer something like Schroder Asian Income. It comes with a more diversified geographic spread across developed Asian, and is underweight China. The fund holds around 65 names in total – with Hong Kong, Taiwan, South Korea, Singapore and Australia accounting for over 70% of the portfolio at last valuation. Major holdings here include the likes of Samsung Electronics, China Mobile and Taiwan Semiconductor Manufacturing – stodgy blue chip stocks that do much of their business in Asia and Australasia. British income investors will also recognise the presence of BHP Group and Rio Tinto. The combined value of the fund’s holdings of the two mining giants came in at over £70m at the end of 1H20.
Schroder Asian Income
I singled this one out for a few reasons really. Firstly, it must be among the larger funds in its sector – net assets standing at around £1.2b according to a quick look on Hargreaves Lansdown. Among the specifically income-focused Asian funds, Schroder Asian Income is the largest of the lot. Two, the focus on income gives the underlying portfolio a value tilt, which is a plus point in my book.
Now, value as a strategy hasn’t done so well recently. The fund has returned 68% over the past five years, which is less than the 88% posted by the MSCI AC Asia Pacific ex Japan Index benchmark. That doesn’t bother me too much, and a chunk of that underperformance is probably due to the exclusion of low-yielding Chinese giants like Alibaba and Tencent. Growth names won’t always outperform value, even if it seems that way right now. A large-cap dividend fund is also a good fit for the site – with the units currently offering a 3.9% yield.
The final reason is probably the most important: the current valuation looks pretty modest. Morningstar has the portfolio’s blended PE at 13.6, with that accurate as of the end of 3Q20. Schroders has the figure at 14.9. Let’s split the difference, probably due to timing differences and methodology, and call it a 7% earnings yield. That looks quite attractive given the current economic environment we find ourselves in. Income seekers can also bank a circa 4% cash dividend too. On that note, Asian blue chips have held up quite well so far on the dividend front, as evidenced by the fund’s interim distribution, unlike stalwarts in the UK. The fund distributes semi-annually, typically in September and March.
Things looks pretty well positioned here in terms of the long-term outlook. The fund has delivered average annual returns of around 8.5% over the past ten years if my numbers are right, and I don’t see why it can’t at least match that in the next decade. A 4% base dividend yield means that mid-single-digit growth should get us there after fees, which currently stand at 0.84% per annum. This does not seem a particularly aggressive target given Asia sports higher growth prospects. On that basis, Schroder Asian Income looks fairly valued for those wanting a more conservative way to own Asian equities.
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