Western economies are mired in debt and crisis, but doom and gloom surrounding Asia, and China especially, is largely the result of sentiment rather than fact. Indeed, the hysteria has been dramatic enough to send markets plummeting. Opinion is highly polarized.  Many have professed that for example China is the archetypal growth story, while others have sworn that it will soon disappear down a black hole, dragging along those in its path. The trouble is, as interesting as these headlines are, and as many newspapers as they sell, nobody is representing the middle ground. And Asia, including China in particular, for quite some time now, has been somewhere in the middle. Taking China as an example, traditionally growth there has rested on three pillars: domestic consumption, investment and exports. Reviewing the current state of these pillars shows that although it has its troubles, China, Asia’s largest economy, is not facing as hard a landing as many would have you believe. What’s more, it’s has far greater income potential than many are aware of.

Doubtless China’s exporters have been significantly affected by a decline in consumer demand from the West. However, it’s important to remember that this is nothing out of the ordinary; the current export cycle is normal. Moreover, export industries in China contribute to just a third of the growth; investment and domestic consumption are equally important. The trouble is we currently do not have a sign of demand from Europe and the US large enough to boost the cycle back into action. We are perhaps only half way through the repair process for the big Western economies. However, instead of viewing this as a step back, we should look at how China, and indeed Asia as a whole, has adapted and how it is now leaning on the other two pillars (investment and domestic consumption) to support its growth.

Since the decline in exports the Chinese government has increased its focus on infrastructure. Recently it announced plans to spend nearly £98bn in a further investment push. The commitment to growth in this sector is showing little sign of slowing down. Last month, the National Development and Reform Commission in China approved plans for 25 new rail projects, 12 highways, seven waterways and nine waste water treatment plans. In certain areas there has of course been over investment, mainly as a result of government stimulus in 2009 and 2010. However, this will be absorbed over time as the economy continues to grow and urbanization develops further. In the last year the proportion of people living in urban areas has moved past the 50% mark. To put this into perspective, in the 1980s only 20% lived in cities. Of course vast urbanisation in turn causes difficulties and the government needs to curb the problems associated with fast urban growth. While a bigger more consuming middle class will boost domestic consumption, China’s one child-policy means they will rapidly be left with an ageing population, which will no doubt cause strain on welfare and become a big drag on future economic growth. 

The main challenge for Asia lies with how China strengthens its third pillar: domestic consumption. Without the same demand for exports from the west, Asia really needs to focus on its domestic consumption to ensure growth occurs. However, many have vastly underestimated the resilience of China to adapt and generate a strong domestic market. Elsewhere in Asia, many countries have shown they can. Thailand, Southeast Asia’s second largest economy, now has a resilient national market supporting its growing middle class. In addition, Malaysia’s economy grew almost 5% in Q1 2012 and wages have increased following the introduction of a minimum wage which should boost consumption. Indonesia too has a robust domestic market, as well as a solid supply of natural resources, both which help protect it from a decline in export demand. These changes across Asia have not occurred over night, but what’s important is that these changes are happening now. 

So what does this mean for income potential in Asia? The search for yield in a low interest rate environment has pushed investors into equities. Indeed so acute has this search become, they are now looking beyond the mature developed markets and are finding that China, and more widely Asia, has income to offer too.  Many companies have already matured to the point where they are paying good dividends such as Digital China, MGM China, Asustek in Taiwan, Sembcorp Marine in Singapore and CP Foods in Thailand. What’s more, there still remains companies with record low dividend payout ratios, strong cash flow and low levels of debt which means as they mature, they can begin to return more of the earnings back to investors in larger dividends. Asia is coming of age.

It’s hard to talk just about countries when we consider the level of maturity in Asia. Instead careful selection of sectors is more important when looking for opportunities for the most income, as it all comes down to opportunities in individual stocks. Indeed, yield is available in most countries and sectors and this is by no means confined to just the traditional yielding sectors of telecoms, utilities and healthcare (see table 1). There are also many great opportunities for investors in the industrial, technology, banking and property sectors.

Market hysteria aside, Asia’s fundamentals are not bad and growth is sustainable for the medium term. There are good opportunities to be had for investors looking beyond the headlines. Having endured their own crisis almost ten years ago, companies, consumers and countries alike are relatively risk-averse and maintain low levels of debt and clean balance sheets. Across Asia, where some sectors have faltered such as materials, energy and exporters, have faltered, others including the consumer and domestic sectors have flourished, some so much so that the chances they offer for income have arguably moved Asia away from the ‘emerging’ category. Examples of sustainable high yielding companies include the likes of Amcor in Australia, NWS Holdings in HK, Telecom Corp of New Zealand, CTCI in Taiwan and Advanced Info in Thailand.

Make no mistake Asia has challenges and crucially the markets have a high correlation with the rest of the world. Global macro themes still drive the markets. Therefore, as long as there are troubles in Europe and the US, Asia will suffer the consequences.  Despite this, there are good income opportunities for investors as Asian companies and countries reach maturity.  The term ‘emerging market’ is more problematic than it used to be.

Table 1