US
The outlook for US economic growth is relatively modest but steady. The underlying economy, decent earnings and a healthy consumer should support equities, albeit with potentially heightened volatility around a prospective interest rate increase. Overall valuations are not inexpensive, but they also do not look overly stretched. In general US companies choose to divert more capital towards share buybacks than dividends, making them less attractive prospects. We would like to hold more exposure to the US, but dividend yields are not as compelling for global income investors.
Europe
Another high-yielding market, where the profits cycle is substantially behind the US and where equity income investment prospects are constructive, based on current dividend yields. Income investors have significant opportunities in banks where dividend payments are on the rise. Examples include ING and Intesa, where yields may reach 6 per cent sustainably. With European Central Bank rates set for the periphery, there are also interesting income opportunities in the booming German economy via such companies as Deutsche Wohnen, the largest residential landlord in Berlin.
Asia Pacific inc. Japan
The Asia Pacific market excluding Japan is mostly dominated by Australia, which is of limited interest to us as income investors, given the predominance of struggling mining companies and banks with subpar dividend prospects. Within Japan we are somewhat contrarian, as it hasn’t historically been seen as an interesting market for income investors. Government-promoted shareholder-friendly policies are having a significant impact on companies, encouraging them to return more capital to shareholders in the form of dividends. The situation is reminiscent of Germany in the 1990s.
Emerging markets/China
We would be relatively sceptical on emerging markets based on governance and foreign exchange risk. On a relative basis we can find more compelling opportunities in other regions. Moreover, emerging markets are likely to be negatively impacted by any rise in US rates, which may compound the weak manufacturing data from China. Having said that, there is a growing opportunity set of high dividend yielding companies, so there are certainly selective investment opportunities. Russian nickel manufacturer MMC Norilsk is a high-yielding (12 per cent historic yield) company that we favour.
