On a global search for yield

Singapore

WHEN traders sold off shares of container port owner Hutchison Port Holdings Trust on Monday following news of a HK$19 billion (S$3.3 billion) impairment charge, Margaret Weir was busy buying.

"I'm very confident of this business," says Ms Weir, who manages US$5.6 billion in Asia-Pacific dividend strategies at Eastspring Investments, the asset management unit of insurer Prudential. She cites increasing port throughput and room for ports to increase tariffs, as low oil prices increase shipping activity.

"Impairment is a non-cash item. It doesn't affect their debt position or ability to pay dividends," she says.

Ms Weir considers HPH Trust, which is trading at an expected dividend yield of 6.5-7 per cent after a dividend cut, as a yield stock that also happens to be a cyclical growth stock.

She is turning conventional income-investing wisdom on its head: yield stocks are usually defensive plays like utilities and telcos, while growth stocks that do well when the economy is booming usually distribute less to their shareholders.

Yet valuations of cyclicals are at a 10-year low relative to defensives, she points out. "We're actually looking for yield in cyclicals," she says.

"People have been hiding in domestic consumer stocks, consumer staples. They've been dumping exporters. It's been the right thing to do as global growth has been in short supply . . . But look at the disparity. As a value manager, I've got to think away from the consensus."

Yield, in whatever form, is increasingly becoming hard to find as central banks keep monetary policies loose and interest rates low, and liquidity sloshes around the globe.

In Europe, yields on some government bonds have turned negative as investors are willing to pay for holding supposedly safe assets which might appreciate even more in price. Swiss 5-year government bonds, for example, are trading at a yield of -0.5 per cent.

As bond yields plummeted, real estate investment trusts (Reits) in Singapore, generally regarded as assets that sacrifice growth for yield, saw buying interest. A five-year graph of price-to-book valuations shows the FTSE ST Reit Index going from one standard deviation below mean a year ago to one standard deviation above in end-January.

Observers say Reits look pricey.

Kelvin Tay, regional chief investment officer at UBS Wealth Management, says that from a foreign institutional investor's perspective, Singapore Reit volatility increases with the volatility of the Singapore versus the US dollar.

Reit dividend yields might be eroded by foreign exchange losses or hedging costs. "The potential impact from USD strength on potential S-Reit underperformance has not been as widely discussed," he says.

Andy Wong, a Reits analyst at OCBC Investment Research, says that Reit valuations will ultimately be determined by what the US Federal Reserve does. He expects a rate hike this year, and thinks Reit valuations are not attractive.

Eastspring's Ms Weir is also not keen on Singapore Reits, pointing to the fact that retailers are not doing well. However, she likes Australia's recent listing, GPT Metro Office Fund, which owns business parks. The portfolio is of good quality with structured rental growth contracts, she says.

At its listing price of A$2 a share, the Reit's forecast yield was 7.7 per cent - above its sector yield of 5.7 per cent, she says. The stock fell below its listing price but rallied recently.

Telcos like China Mobile and Singtel remain favourites. "Telcos for us are consumer stocks. People underestimate the addictive nature of data consumption," she says.

Across the region, Ms Weir likes Chinese banks trading in Hong Kong. "They have considerable upside in our models with a large margin of safety," she says.

Another cyclical she picked up recently was Korean oil refiner SK Innovation, which was trading at half its book value. It recently fell into the red for the first time in 37 years, and announced that it would not pay out dividends. "We very seldom buy a stock not paying dividends. But we believe the capital expenditure cycle is peaking, cashflow will be re-established, and the dividend policy will be re-established," she says.

UBS's Mr Tay points to the offshore marine sector as a place to hunt for opportunities. "Dividend yields for the sector are now well above 4 per cent and our view is that we should see a gradual rebound in oil prices towards the last quarter of the year," he says.

READ MORE: Europe still favoured for yields and international firms