Dynamics Driving Dividend-Paying Sectors

 In Market and Investment Insights

In this video update, Alex Crooke, Co-Head of Equities and Portfolio Manager on the Global Equity Income Team, reflects on the likely impact of U.S. tax reform, potential trade wars and his expectations for the remainder of 2018.

Key Takeaways

  • Potential trade wars are weighing on how we look at individual companies. We’re also expecting much from tax reform in the U.S., such as increased consumer spending and what companies do with their spare cash.
  • We see opportunities in financials, technology and consumer.
  • With the U.S. economy on a stronger footing, the Fed will probably hike rates quicker than the market expects.

Yes, I think the first few months of the year have been an element of up and down and some uncertainty in markets, and I think particularly around politics here and certainly U.S. politics. I think if we’re honest with ourselves, we’ve got a few things slightly wrong from the end of last year in terms of Donald Trump getting through some very meaningful tax reforms, and again, I personally didn’t think would pass through government policy there.

And then also, sort of looming worries around trade wars. And I think we do need to reflect on these so it’s certainly the tax reforms will lead to a significant increase in probably consumer spending. I’m expecting a lot of that tax giveaway, if you want to think of it that way, coming back to wages to employees which will get spent, so that should stimulate the economy quite well. Again, to understanding what companies are going to do with that spare cash, and we should find out in the next sort of quarter really, and again the impact that can have.

Trade wars, I’m a bit more on the fence with these things. I think it benefits nobody, really, ultimately down the road, but politically, they sound very good and you always have to see how the reaction is from other parties. But net, I still feel the U.S. economy’s on a very strong footing.

That should actually mean that the U.S. Federal Bank will increase interest rates probably at a quicker rate than the market is expecting, so maybe four increases this current year. And again, that tends to lend itself to maybe more in a sort of defensive cyclical sort of market where actually financials should do quite well.

I think looking forward into 2018, where we’d like to see, I think, continued good performance is, I think, still around some of the technology space. Then we’ve seen a bit more volatility in some of these names this year. I’m expecting companies that have had problems with the quality of their data or managing it will have to spend some more money. Certainly, margins might come down but actually growth is still well established in a number of areas whether it’s hardware, software areas. So I still think some strong drivers in these companies. Revenue growth would be good, profitability recovering well, as well. I think the consumer, and it’s very cheap stocks in the consumer area. Again, worries about consumer spending, inflation trends. But actually, I think we should see some of those alleviate or lift in the second half and so I’m expecting consumer spending to have a bit more of a bounce back in the second half.

And then financials is still an area I’m very positive on again as rate curves increase, so you’re seeing short-term funding increase rates there. Longer-term rates going up as well. That’s sort of a steeper yield curve, we call that. But it should be good news for banks. Again, borrow short and lend long. One would hope increased profitability for them and increased lending. So again, good news hopefully for banks in particular.

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