Valerio Baselli: Hello and welcome to Morningstar. The Asia-Pacific region offers a wide range of attractive income and growth opportunities in both developed and emerging markets. To talk about such opportunities and the risks associated with those markets today, I’m joined by Jason Pidcock. He’s an investment manager in the Asian equity income team at Jupiter Asset Management. So, Jason, first of all, why do you think investors hungry for income, European investors more precisely, should look at Asia in this moment?
Jason Pidcock: As you mentioned in your introduction, Asia offers growth and income. And what we’re looking for is companies that have an ability and willingness to pay attractive dividends today. But whether it will generate earnings growth that can fund dividend growth in the future. So we’re not looking for a static yield. We’re looking for a growing dividend stream. And we do find enough growing companies in the region either that growing from relatively high domestic consumption in local markets like India, or they’re very successful exporters who see the whole world as their marketplace.
Baselli: Right. The strategy that you co-manage the Jupiter Asian Income Fund, which excludes Japan by the way, hasn’t been able to overperform years and the Morningstar category benchmark over the last four years. What were the winning choices in this regard?
Pidcock: It’s been from a combination of countries selection, sector allocation and stocks selection. One of the biggest benefits from a relative fund performance point of view was a very large underweight position in China, which we then took to a zero weighting in July 2022.
And we haven’t invested, in China since then. Even when they’ve had the market has had temporary bounces. So we prefer the more developed markets in the region. And we’re very selective when it comes to emerging markets. We have had a decent position in India, which has helped, but a lot of our country performance has come from countries like Taiwan, Singapore and Australia.
We’ve been overweighting tech that has helped and we’ve been underweighting some of the sectors which have underperformed more recently, such as healthcare. So it has been a combination with our stock, focused, where we have 30 holdings and some of our largest holdings, particularly in the tech sector, have done very well for us.
Baselli: Very interesting. And specifically, if you had to name three stocks or three income stocks that you are particularly positive about right now, what would they be? And why?
Pidcock: This three names I’m going to give you are all large positions within our fund the top five holdings. Two of them are tech companies in Taiwan. We remain very positive on the outlook for the tech sector, particularly companies that are benefiting from AI linked demand. So these two companies are Hon Hai and MediaTek. Hon Hai is the world’s largest contract manufacturer.
So it makes products to other people’s design, the largest contract manufacturer is Apple, it makes more iPhones than anybody else. But it has many other customers, including Nvidia, that has given it a lot of growth recently. Hon Hai do have manufacturing capabilities globally. Recently they’ve been in the headlines for shifting some production from China to India very successfully.
And just today, it was announced that $6 billion, all inserts for Apple iPhones have been exported, from India. The company is MediaTek. MediaTek is a chip designer. So they outsource the production of the chips to companies like TSMC, which we do also own in the portfolio. But they focus on the design. A lot of that chips go into mobile phones.
And we do think that the replacement cycle of phones over the next couple of years will be very, very strong as people buy newer phones with AI capability. The third company is a domestic demand stock in India is ITC. ITC is one of the largest consumer companies in India. It focuses on staples like food, beverage, cigarettes, agriculture, paper and packaging.
It also has a hotels business, which it’s going to partly spin off in the next few months. So for us it’s a very nice proxy on domestic demand growth in India. One thing that these three companies have in common is that they all have a net cash position on their balance sheet, which allows them to play attractive dividends.
They’re also large cap stocks, and therefore the shares very liquid. The market cap of Hon Hai is about 90 billion USD, ITC about 72 billion. And MediaTek about $65 billion. So they take all the boxes that we look for in our portfolio.
Baselli: That’s very interesting. Finally looking ahead, what Asian markets and sectors do you like the most?
Pidcock: Yes. So the key for markets for us in terms of absolute size are Australia, Taiwan, India and Singapore, those four markets make up the bulk of our portfolio. We see them as relatively low risk but with high quality and growth opportunities. And in those four we can we can have a mixture of global demand and domestic demand. But domestic demand, where the addressable marketplace is relatively large, India being a much larger emerging market than most others, in fact all others but China.
So, we do see high dividends available in these four markets. And we’re also able to get exposure to the sectors that we very much like, such as technology. So all of the stocks that we own in Taiwan are tech stocks. That is a sector that Taiwan does very well. It is growing, because of, AI linked demand.
And we do think over the next two, three years growth rates, there will be very, very strong. In Australia we’re playing a mixture. So we have commodities, infrastructure, but also financial services. In Singapore we have companies that have a lot of the earnings from neighboring markets, particularly neighboring Southeast Asian markets. Singapore Telecom and DBS do have operations in, many other markets, which add to the growth. So, between those four, we’re able to get access to everything that we like, where liquidity is good, where we see governance risk as being low, and where growth prospects over the long term are compelling.
Baselli: Jason, thank you so much for your time for Morningstar. Well, thanks for watching.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.
