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Trump's talk doesn't put me off China, says Kerley

Mike Kerley, manager of the Henderson Far East Income (HFEL) investment trust, isn't allowing US president Donald Trump's rhetoric on China to dampen his enthusiasm for stocks tapping into the country's consumer growth.

He explains how he seeks to balance high and growing dividends in the 5.7% yielding trust, and why Korea could stake a claim as the next dividend hotspot. 

Can't watch now? Read the transcript

Selin Bucak: Hi, I’m Selin Bucak, and I have with me Mike Kerley from Henderson Far East Income trust. Hi Mike!

Mike Kerley: Hi!

SB: First, I want to talk to you about Donald Trump. Obviously he’s been saying a lot of stuff coming on to his presidency and the impact on Asia is unknown, there are rising tensions. What do you think a Trump presidency will mean for Asia? How is this affecting your asset allocation and your strategy?

MK: Well I hope it doesn’t mean what he said leading up to the election, however I think he’s painted himself into a corner now, whereby he has to do something. You look at the people he’s appointed as his trade representatives, etc, who have a history of being not that positive towards China. So I suspect that there will be fairly early in his presidency some announcements about China and trade and currency manipulation.

Hopefully, most of it remains words rather than positive actions. If he does name China as a currency manipulator that doesn’t have much implication. However, if we start with trade wars and trade tariffs then that is more significant. So to be honest I don’t know at this point. Until he comes out with firm policies it’s difficult to actually say what the implications are.

To be honest it hasn’t actually had much of an impact on what we do with the portfolio. We are still focusing on the companies we like and then we’ll weigh up the implications as and when they come.

SB: And looking over to China obviously this time last year there was a lot of noise and a lot of worry over what’s happening in China, its growth potential. But that seems to have died down recently. Do you think that the issues are actually being addressed? What can we expect from China for the rest of the year?

MK: People’s opinion of China kind of comes and goes. So you’re right, absolutely, this time last year everyone was worried about the currency devaluing, etc. And there are still some fears this year that the currency will devalue. Especially going back to your previous question about Trump, trade tariffs and implications like that could have a negative impact on the currency from here.

I do think though that China is recovering, there is some momentum in the domestic economy. Are they addressing all the reforms that needed to be addressed? Probably not, but they have to maintain a level of growth in order to get these reforms through.

SB: How much of the portfolio do you actually have invested in Chinese companies? And where are you looking for opportunities there?

MK: We have about 18% of the portfolio invested in China, which is quite a high portion – it’s the second highest weighting in the portfolio – and the allocation is to lots of different areas really. We tend to stay away from the areas which are policy driven, like banks and property, but we do like domestic areas, we do like the internet sector, the technology sector, and anything which is exposed to domestic consumption rather than necessarily investment activity or policy.

SB: Could you give me a few examples of the companies you are invested in?

MK: from a Chinese perspective, we like Netease, which is a US-listed ADR [American Depository Receipt]. It’s not really a massive yielding company but they do generate a lot of cashflow and we think the dividend will be progressive there. It’s an online gaming company, so World of Warcraft and things like that – it has the franchise in China for that. Very strong numbers, very good management, quite a big discount to other, similar companies.

SB: And geographically how are you allocated?

So we have roughly 18% in China, slightly more in Australia, because we have two parts of the portfolio: 50% dividend growth and 50% dividend yield. So some of the more emerging parts of Asia will be dividend growth whereas the more developed will be the backbone of the yield, and Australia comes into that high yield backbone, if you like.

We also have quite a high rating to Korea which, again is somewhat unusual because it’s a low yielding market, but we think it’s the only developed market in Asia with dividend growth. Not because there’s earnings growth, but because we think payout ratios will rise there quite significantly. So those are the three largest allocations.

SB: So which companies do you hold in Korea?

MK: Well we like Samsung Electronics. I’ve covered Asia for a long time and looked at Samsung electronics for a long time but this is really the only time we can look at it with a yield cap on. We think there is a big change taking place there. Clearly there are some challenges as we’ve seen recently in the press, but we think the cashflow generation will start making its way back to shareholders over the coming years, and that makes it much more interesting.

SB: great, thank you.

MK: Thank you.

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Michael Kerley
Michael Kerley
105/150 in Equity - Asia Pacific Excluding Japan (Performance over 3 years) Average Total Return: 41.76%