How do challenging market cycles impact Asia's high yielding stocks?

Partner Insight: Dividend growth stocks and high yielding companies in Asia can deliver attractive total returns for investors, but Matthews Asia Portfolio Manager Yu Zhang explains why investors must be aware of the region's earnings cycle in order to ensure success

Global investment markets have been challenged in numerous ways in recent years including an increasing number of external-related risk factors such as geopolitical trade issues, rising interest rates and high energy prices. All of these issues have been headwinds for Asian equities in particular. 

For Matthews Asia Portfolio Manager Yu Zhang it has highlighted the need for investors to ensure they properly analyse and understand the earnings cycle in Asia before investing in high-yielding stocks. It is a strategy he follows on the Matthews Asia ex Japan Dividend Fund.

He explains: "We tend to think of our portfolio as a mixture of dividend growth stocks together with stable, high-yielding companies. But the earnings potential for high dividend-yielding stocks hold up much better than cyclical dividend growth companies in specific cycles. Therefore, as well as using dividend policy as a way to find investable stocks from the bottom-up, we also position our portfolio in slight anticipation of the market to ensure we incorporate a macro focus into the investment process.

"For example, if we believe the market is likely to chase growth at any cost, we may tilt the portfolio toward stable, higher yielding stocks.

"On the other hand, if we feel the market is in risk-averse mode, and people are chasing high-yielding stocks as a sort of ‘safe haven', we are likely to find better opportunities in the growth companies."

Though Zhang runs a fairly concentrated portfolio of circa 50-80 stocks within the fund, a number of portfolio tilts have been evidenced over the past year as concerns about trade between the U.S. and China have intensified.

In addition, he has added to his positions in a number of high growth companies that he believes have been aggressively de-rated following concerns regarding the regulation of the Chinese and Hong Kong investment markets.

"These are both examples of sentiment impacting market sell-offs rather than stocks experiencing any real change in their underlying fundamentals," he notes.

Click here to read the full article on the evolution of Asia's income universe and why benchmark agnostic Zhang predominantly looks to small-caps for the best opportunities.