Yuan-denominated bonds issued in Hong Kong, commonly called dim sum bonds, were first issued in 2007. The issuance has grown rapidly, with the volume peaking at about 300 billion yuan (US$45 billion) in 2014. However, the volume has gradually shrunk in the last three years, with only 800 million yuan this July.
This has led to concerns about whether the local bond market is sustainable, as the biggest difference between bonds and stocks is that bonds have a maturity date, when the issuer must repay the bonds in cash. Therefore, a smaller issuance volume means a shrinking total market value in bond market.
This development, coupled with an ever-increasing appetite for stable cash income in an ageing society, should bode well for alternative cash-yielding assets such as real estate investment trusts (REITs) and infrastructure trusts.
The growth of Hong Kong’s bond market is relatively slow with trading volume consistently lagging behind the issuance volume. This indicates that past issuance has not met actual demand in the market, as both bond funds and private investors often hold the bond until maturity and do not seek to profit from active trading. As a result, the trading volume is relatively small. If the size of dim sum bonds shrinks, this phenomenon will be more prominent.
Furthermore, as the demographics change, the investment needs of retired people will slowly become more conservative. This will lead to more demand for stable and transparent cash income. REITs and other cash-generating assets, such as infrastructure trusts and other high-dividend stocks, should become more appealing over time.
One reason to consider high-dividend stocks is our tax regime. Dividend tax is not applicable in Hong Kong, and so mature enterprises can offer higher dividend rates than their counterparts around the world. But ultimately, the dividend yield of a stock is solely determined by the management.
During an economic downturn, a company will certainly consider reducing the dividend payout when profit decreases; even with a booming economy, companies may also choose to retain more profit for new investment rather than paying dividends to investors.
The company will become stronger after making the right investment, thus increasing the total return per share. But from the perspective of retirees, such a responsible strategy will reduce the older investors’ disposable income and thus affect their lifestyle.
Among the high dividend yield stocks, some have a more transparent and stable cashflow. For example, the income of REITs mainly comes from rental income of commercial real estate assets. Leases of prime offices and malls usually last at least three years while contracts with logistics properties could be 15 years or longer.
Some of these long-term leases determine the rents at the beginning while others agree on the future increment of rents. One can easily estimate rents generated by the assets either way, regardless of economic conditions.
Under the law, REITs must distribute rental income as dividend after deducting expenses, but the management does not have the authority to set the payout ratio. Therefore, rental income as well as dividend rates of REITs can be calculated. So as far as investors are concerned, REITs are more transparent.
REIT is a type of vehicle whose performance is directly linked to the local markets. Investing in a single market naturally bears more risks than diversifying investment in several markets. In the Asia Pacific region, although the key economies are closely associated with each other, each market has its own cycle.
The office market in Australia, for example, showed an upward trend in rents only since last year and some are in the upcycle, while rents in Singapore has gone down for two years, possibly reaching the bottom at the end of this year or in next year.
Investors looking for a stable cashflow may achieve their goal through a diversified portfolio in those several markets.
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