There has been much talk about China's future prospects in recent months.
But one area where China has definitely made its presence felt in recent times is among the biggest dividend payers in the world.
According to the most recent edition of the Janus Henderson Global Dividend Index, three of the top 10 biggest dividend payers in 2023 were Chinese companies.
So with valuations falling, China could be attractive to collect dividends, but some warn caution to avoid value traps.
Ben Gutteridge, investment solutions director at Invesco, says there is the opportunity to collect dividends from China but adds investors should move carefully.
Invesco had a 2.8 exposure to Asia at the end of 2023. It dropped Schroder ISF Asian Total Return in favour of Schroder Asian Income in the last quarter of 2023.
The fund has a relatively low exposure to China, standing at just under 10 per cent at the end of February.
Gutteridge says: “Given how far valuations have fallen, China looks a very interesting opportunity to collect both dividends and potentially enjoy capital appreciation.”
He notes ongoing struggles in the real estate sector and weak consumer sentiment are a cause for concern, but this could benefit from interest rate cuts or social lending programmes, although estimating when this could happen is a tough task.
“Investors should also be wise to businesses who are funding dividends by issuing (and diluting) equity; this is a particular concern around the banking sector as balance sheets are used to manage failing real estate loans,” says Gutteridge.
“In summary, Chinese dividends look an increasing opportunity, but we would encourage investors to move at only a modest pace, and to utilise active managers in an effort to avoid the likely presence of value traps.”
Sam Witherow, manager of the JPMorgan Global Equity Income fund, said he was making selective investments in China but focusing on company fundamentals above all.
He said: "There are definitely encouraging signs out of China for income investors. Payout ratios have been rising and many companies have been instigating progressive dividends, relatively unusual in emerging markets, and even launching some buybacks.
"We have selective investments in the Greater China region but it’s fair to say that there is heightened uncertainty here around cash generation and the direction of underlying profit growth. We look to invest in the corporate fundamentals first and the dividend second."
Three on the Asset Allocator database picked up Federated Hermes Asia ex-Japan Equity in the last quarter of 2023: Liontrust, Hawsmoor and Evelyn Active.
As well as holding this fund, Evelyn Active holds Fidelity Asia, Schroder Asian Total Return, Schroder Asian Income Maximiser and Pinebridge Asia ex Japan. At the end of January it held a 9.8 per cent allocation to Asia with the average on the database standing at 4.3 per cent.
Matthew Chambers, investment manager at Evelyn Partners, says: “While yields have risen in China, we don’t see this a major factor driving asset allocation decisions.
“Firstly, it is important to consider total return prospects, and China has plenty of challenges.
“Exposure to China also needs to be put in the context of it being less than 2.6 per cent of the MSCI AC World Index, so tiny in the context of a multi-asset portfolio, and income portfolios are typically more defensive in profile.”
Over at Iboss, the firm has a 6 per cent allocation to Asia but sold off Fidelity China Consumer and First Sentier All China this year.
Chief investment officer, Chris Metcalfe, tells us Iboss remains positive on Chinese equities but has allocated to emerging market and Asian managers for a more flexible approach to the region, including Hermes Asia and M&G Global Emerging Markets.
Metcalfe says: “On the one hand and positively, China is the second-largest global economy, on the other hand, it is deemed uninvestable by swathes of the world's politicians, pundits and fund managers.
“Much of its uninvestablility stems from the government's attacks and punitive legislation targeting some of the country's most successful and profitable sectors.”
For these reasons, he says there remains negative sentiment around China.
Metcalfe adds: “Except for much of the property market, we feel that much of the bad news is already in the prices of many Chinese assets, having fallen over 50 per cent since its peak in 2021.
“Though markets remain extremely volatile, it is our view that the lows have somewhat plateaued and the market seems much more positive on favourable news.”
Metcalfe notes in recent weeks Chinese assets have seen some positive returns despite developed market falls, which could mean they could work as a diversifier against developed market global equities even in tougher market conditions.
“This may seem counter-intuitive but it is worth remembering that an allocation to China did just that in the toughest months for the market during the Covid pandemic,” he adds.
Tara O'Connor is senior reporter at FT Adviser
