Dividends Defy Expectations
Despite worries about a global economic slowdown during the first half of 2019, many companies still paid – and even raised – dividends. Can it continue? Ben Lofthouse, Head of Global Equity Income, says one indicator he is watching is unemployment.
- Markets dealt with a series of worries during the first half of 2019, including central bank policy, Brexit and trade disputes. The potential for a slowdown in global economic growth was also a concern.
- Some issues were resolved or turned out better than expected. Others were not. Even so, dividend payments have been remarkably consistent, and dividend growth has exceeded expectations.
- Whether the trend continues may depend on the health of the global economy. One indicator we are watching: unemployment.
Ben Lofthouse: For the first half of this year, global equity markets have been quite strong really, led, the U.S. particularly strong. We have to remember we are coming off of a particularly tough fourth quarter last year, when there was quite a bit of sell-off in most markets around the world. So, what we have seen is a big rebound, helped a little bit by central bank policy; so there has definitely been recognition that growth has slowed and growth expectations are lower than expected. So, we have seen the central banks moving their policy and their language to suggest more accommodation, which generally equity markets take well. And then I think around that actually we haven’t seen the sort of growth slowdown that was perhaps predicted by the market fall-off in Q4, and the credit market particularly has stabilized. So, you know, we’ve had a good first six months, but it is in the context of, you know, it being quite a tough end-of-year last year.
At the start of the year, there were a number of key risks that were at the forefront of fund managers’ minds, including ours. Some of those have been resolved, and some of them haven’t. The first one, which we can say has been somewhat resolved, is the Federal Reserve and what they would do. So I think towards the end of last year there was a feeling that they were in the mood to significantly continue to increase interest rates and to unwind the balance sheets. The language this year has really changed on that. And so, that’s been quite a big change and it was something that the market really didn’t know which way they were going to go, whether they were going to react to the sell-off last year.
The things that have not changed yet include Brexit, where resolution of that is still being kicked further down the road. It was meant to be the end of March, now we have got the end of October. We’ve got leadership election going on, so that is still very uncertain. And then at the same time, the bigger one I think globally for fund managers is the trade. So again, this was something where we were looking towards the end of March, early April for resolution, and then we found out that we weren’t getting that resolution. And the markets, particularly the tariffs, were going to come in and then they haven’t come in. So the uncertainty around that is still very high. And again there’s no definite timeframe for that to finish. So, some things are being resolved, other things still remain very much unresolved.
So, interestingly, against the face of all the headlines and the economic concerns through the end of last year and continuing through this year, dividends and dividend payments are coming through remarkably consistently from companies around the world and even in Europe. And so again, most of the very high yielding areas within the banks have paid their dividends. We have seen considerable increases in dividends from some of the areas like mining where they’re seeing very high commodity prices. The oil sector, although oil has been volatile, it is in a much stronger footing than it was three or four years ago. So actually, the dividends are coming through from a number of different sectors, a number of different regions. And the dividend growth I would say has probably exceeded our expectations, given the sentiment.
So, the second half of 2019 is going to be another very interesting period for markets. We’ve seen a very big divergence within defensive and cyclicals within the market; we’ve seen a big fall in bond yields, so, again, expectations for inflation have fallen a great amount. Second half of the year is going to be very interesting from a point of view to see whether this slowdown in growth really comes through at the same rate people are expecting. If it doesn’t, I think there could be considerable rotation in the markets. But the key thing I think that we are watching outside of all of the sentiment news is unemployment. And so we have seen a slowdown, the trade war issues are, have been extended, and so the key thing I think people should be watching for is the area that hasn’t really fallen yet, in our unemployment trends. Still employment has remained strong in a number of different economies around the world actually, so there may be low inflation, but employment has remained strong. I would say the key thing for us is we are just watching to see where the company’s sentiments indicators that are falling really get impacted within to CAPEX plans activity, hiring activity.
So, you know, I think there is quite a lot of opportunity there, a lot of uncertainties baked into markets. But I would be very much watching those unemployment figures.
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