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The great Asian dividend rush is just getting started: Gadfly
[SINGAPORE] How do you stop life insurers and pension funds from drowning in cash? Let them float on a thicker cushion of equity.
Taiwan's Financial Supervisory Commission did just that recently when it lowered the risk-based capital requirement for insurers. The change, combined with an upcoming tweak in pension funds' investment mandate, could help the local stock market attract between US$25 billion and US$35 billion over the next five years, according to Credit Suisse.
That's a lot, considering that foreigners only bought about US$34 billion of Taiwan equities in the nine years through 2015. Most of this money is likely to end up in dividend-paying stocks in order to earn a steady income.
For a good reason: Around the world, more and more safe government debt yields zero or less. Even the compensation for taking a punt on risky corporate borrowers has slumped as funds have poured into emerging markets this year.
The hunt for yield among managers of large pools of money is taking various forms. South Korea's postal service, which oversees about 110 trillion won (S$130 billion) of savings and insurance, plans to boost holdings of US equities and bonds, Bloomberg News reported last week.
The Singapore sovereign-wealth fund GIC, which manages workers' provident funds as well as part of the city's foreign-exchange reserves, is in talks to buy 7 per cent of Vietcombank, its second foray in Vietnam this year, Reuters reported.
The fund's 20-year real rate of return has dropped to 4 per cent, from 4.9 per cent last year. For most pension funds and insurers, though, dividend-paying stocks with manageable volatility might be the preferred strategy to buoy returns.
No wonder, then, that a market-capitalisation-weighted index of 44 stocks in developed Asian countries with a dividend yield of at least 3 per cent and a beta of between 0.8 and one has been climbing since the Bank of Japan introduced negative rates in February.
The search for dividends could eventually make these stocks too expensive. For example, Australia's ASX (the stock exchange operator), Crown Resorts, Woolworths and Brambles are all trading 1.8 to 2.4 standard deviations higher than their five-year price-earnings ratios.
Still, there are few alternative avenues for long-term funds. In developing Asian countries, where a low proportion of superannuation funds is currently invested in equities, the scope to do more is correspondingly greater.
In Thailand, only 17 per cent of the top pension fund's assets are in stocks, compared with 61 per cent in Hong Kong, according to OECD data. In India, where 10-year government bonds yield an enviable 7 per cent, the government has allowed the biggest retirement-fund manager to invest between 5 per cent and 15 per cent of new assets in equities. Until recently, the fund wasn't allowed to buy stocks.
Additionally, this year's foreign purchases of Taiwan stocks have exceeded US$13 billion, with about half of the money coming in the current quarter. This means that their stock-price volatility ranges between 80 per cent and 100 per cent of the broader market.
Evidently, the scramble for dividends in Asia is just getting started.