Where should income investors look for value?

Posted: November 7, 2013 in Diverse

We continue to favour Asia where we find companies with high yields and attractive growth. In Indonesia, we own a gas distribution company, which is benefiting from rising demand and a favourable regime that encourages infrastructure investment. By comparison, European policymakers seem intent on scoring points with voters by imposing price controls on utilities.
A rapidly-growing middle class, who places a premium on image, has translated into strong growth for luxury brands in Asia, which we think is set to continue. While companies such as LVMH and Swatch offer little by way of dividends, Hugo Boss is set to deliver a 4.3% yield in 2014. Relative to peers the company has been slow in expanding into Asia, which means a catch-up is occurring, and so far progress has been positive.

By Stephen Thornber, Portfolio Manager  Threadneedle Investments

We have increased our holdings in Europe, although we retain our cautious stance on peripheral countries. We recently bought BMW, an auto industry winner. An upcoming model refresh is well timed amid improving demand and the Bavarian automaker continues to apply pressure on competitors through innovation.
We have purchased banks on the back of growing signs of economic stabilisation in the eurozone. We like UBS, which has been downsizing its sub-scale investment banking operations. The company is strengthening its capital position and focusing on wealth management where it is a global leader. We think that market expectations for the dividend in 2014 are too low, and that progress to date sets up UBS for significantly higher dividend payments. We also own BNP Paribas, a well-capitalised French bank, which can grow earnings as provisions fall if the economy improves. The company has a strong franchise, a healthy yield and is valued attractively relative to US peers, which have re-rated over the course of the year as US growth has accelerated.

In conclusion, despite an improvement in the global economic growth outlook, we anticipate that the yields offered by fixed income investments will remain relatively low and that income-seeking investors will increasingly look towards equities as an attractive source of growing income. High dividend stocks remain attractively valued, but a selective approach is essential. We are finding value in Asia, where growth is strong, and in Europe, where valuations are reasonable. Thematically, deleveraging and US shale are themes Threadneedle favour. Overall, we believe that global equity income investing remains a compelling long-term strategy for both income-seeking and total return investors.

Navigating a low growth, low interest rate environment


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