Taming the tiger: Finding the gems in the dynamic markets of Asia

Source: Trustnet

Asian stock markets are often seen as dynamic and exciting, albeit risky and volatile. When thinking of the Far East phrases such as ‘economic miracle’, ‘tiger economies’ and ‘currency crisis’ come to mind.

As an investor who witnessed the aftershock of the Japanese economic miracle, the contagion of 1997, and who was based in Hong Kong when the China bull market was in full swing, I am well aware of what a ride these markets can be.

At first glance, such markets may not seem a natural source of income for a high-quality, low-beta strategy like the Aegon Global Equity Income fund. However, underneath the boom and bust nature of Asian markets lies several wonderful companies, many of which we hold in our portfolio.

Historically, Asian technology stocks were low-quality assembling operations, typically located in Taiwan. Such companies still exist, often paying high dividends, but the low value-add nature of their core business does not appeal to us. We prefer global leaders with strong market share.

For example, TSMC is the world’s leading semiconductor manufacturer, with almost 70% of the global foundry market, far ahead of number two, Samsung Electronics, which commands under 10%. We have held TSMC since launch in 2012, making an eighteenfold return on our money.

Another Taiwanese winner has been Delta Electronics. Like its compatriot above, Delta is a world leader operating in a structurally growing market. The company provides power management and liquid cooling products to data centres, putting it right at the heart of the boom in artificial intelligence (AI) and driving a sharp rise in its share price over the past few years.

Across the Taiwan Strait, we own another technology company, Tencent. Just about every single Chinese person uses one or more Tencent products. It is a leading software business, with operations in gaming, AI, digital payments, the cloud and messaging platforms, giving it a wide range of growth drivers.

The success stories go further than the tech sector. Asia is also home to several excellent financial companies. Australia’s Macquarie Group springs to mind here.

The company is an expert at deploying capital between its diverse range of businesses, which include infrastructure, wealth management and investment banking activities, and its share price has outperformed most major banks around the world over the past decade thanks to this proactive approach.

We also own DBS Group in Singapore, which is far less dynamic in changing its business mix but every bit as attractive as an investment. DBS prefers to focus on the traditional banking model and one could certainly make a case for it being Asia’s best bank in this category.

As a result of this focus, it is highly profitable, as its 17% return on equity suggests. In fact, it has so much excess capital at the moment that it is paying a quarterly ‘capital return’ dividend in addition to its ordinary dividend, which in itself has almost doubled since 2022.

Taken together, these distributions give an annual dividend yield of close to 6% and make DBS one of Asia’s great dividend growth (and capital appreciation) stories of recent years.

‘Dynamic’ and ‘exciting’ are perhaps not terms you naturally think of when it comes to telecommunication companies, which are usually blighted by low growth and high debt.

Thankfully in Singapore Telecommunications we have found one offering growth, perhaps not in the core market, but in data centres and emerging markets such as India. The balance sheet is robust, allowing them to return a 4.5% dividend to investors.

Within the Aegon Global Equity Income fund, we have been overweight Asian markets for some time, finding them an excellent source of alpha, beta, and income, quite the triumvirate.

It’s not a homogeneous region, and that brings numerous governance, macroeconomic and geopolitical considerations with it. However, with the correct risk framework and rigorous analysis before one commits to a stock, the rewards can be great.

Robin Black is an investment manager at Aegon Asset Management. The views expressed above should not be taken as investment advice.