6 April 2016

Still opportunities for high-yield investments in Asia

A SchrodersTalking Point titled Asia’s ageing population drives demand for dividends by King Fuei Lee, Head of Asia Equities at Schroder Investment Management has noted that changing demographics will create opportunities for dividend investors in Singapore.

According to Lee, Singapore’s population will begin to shrink around 2025 with the current birth rate and without immigration. "By 2030, there will only be 2.1 working-age citizens to support each citizen aged 65 and above. As such, of the 'four Ds' (demographics, deflation, disruption, deleveraging) impacting companies in Asia, we think Demographics will create opportunities for dividend investors," he stated.

The analysis notes that global stock markets have been rocked by short-term volatility, triggered by falling commodity prices and the start of the US Federal Reserve’s hiking cycle. In the long term however the company's views on Asian stocks have not changed, with impact from the “four Ds”.

Opportunities can be found in:

Ageing demand for high yield

Investing in dividend-yielding stocks in a low-yield environment has become almost de rigueur for investors in search of returns in the current environment. The conventional wisdom is that investors all over the world are seeking more lucrative alternatives to the low (or near-zero) interest rates that are being offered on bank deposits.

What is perhaps less well understood is that a high dividend-yielding strategy is often also the preferred choice for an ageing population.

Behavioural economics

Although economics is often referred to as the “dismal science” for its inflexibility to relate to real-life human behaviour, the area of behavioural economics has shed light on a multitude of issues and has often been at the forefront of the most insightful observations about investor habits.

According to the behavioural lifecycle theory, an individual mentally breaks down their wealth into three components:

Current income
Current assets
Future income

At the individual level, the temptation to spend is always greatest for current income, and least for future income. This is especially the case as people age and start to retire. They have a tendency to consume out of dividends received (or current income) rather than from capital gains (or future income). As a result, these investors generally favour high dividend-paying stocks over those that pay lower dividends, which in turn has led to outperformance from the former.

Schroder Investment Management's analysis has found a strong positive relationship between the long-term returns of dividend-yielding strategies in the US and the change in the proportion of older investors. Effectively, the larger the increase in the proportion of older people in the general population, the greater the relative demand for high dividend paying assets.

What this means for Asia

This trend is particularly relevant for countries and territories such as Australia, Hong Kong and Singapore – the traditional bastions of Asian dividend-paying stocks. Although commentators typically follow the market adage that the time for dividend-yielding strategies has passed, but Schroder Investment Management says this is not actually the case.

For the one in three working Singaporean adults who do not plan adequately for retirement*, and long-term investors wondering what to buy in a deflationary world – where rock-bottom interest rates and ageing demographics are the norm – high dividend yielding stocks are looking as ripe as ever for the picking, the company says.


*Survey reveals that young Singaporeans have a positive attitude towards financial planning for retirement, NTUC Income, 15 February 2016. http://www.income.com.sg/about-us/press-releases/survey-reveals-that-young-singaporeans-have-a-posi.