Has Market Volatility Impacted Global Dividend Growth Expectations?
In this video update, Ben Lofthouse, Head of Global Equity Income, discusses the reasons behind the market rotation in the first quarter, whether recent volatility has affected dividend growth expectations and examines the outlook for global equity income investors.
- Higher-yielding defensives initially underperformed but rebounded on growth concerns
- Dividend growth expectations appear underpinned by corporate earnings
- We see value available in consumer staples, utilities and real estate
Q1 this year has been a bit of a roller-coaster ride for active markets and that includes equity income investors. We have seen a period where the synchronized growth that was coming through globally has continued, but that has triggered some higher interest rate expectations in the United States. And suddenly what that triggered was quite a big rotation in the market, so some high-yielding sectors performed pretty poorly for the first couple of months this year. And then the converse was towards the end of the quarter, we saw people being a little bit more worried about global growth on things like trade and some of the unrest in the Middle East, so what you have seen is the defensive sectors, the high-income sectors, quite a few of them have performed well towards the ends of the quarter. So it really has been a fascinating quarter. Underlying what is important to say is that not much has really changed, so at a company level, the earnings are coming through as expected, there hasn’t been a significant slowdown and there haven’t been particularly any big regulatory changes or actual announced trade changes that would have caused this. So underlying earnings growth remains on trend.
It is really interesting to see whether the volatility, you know, which you would expect to be associated with actual real underlying change might affect dividend growth. But actually dividend growth expectations, you know, look pretty well underpinned. Why is that? Well, big sectors such as resources, the oil price is high and has remained high, so that is great for their cash flow. One of the key things is for attractive valuations and improving free cash flow to pay dividends. So things like the oil sector, some parts of the material sector in mining, there is tightness in some parts of chemicals and paper, so actually that is all looking good. Financial regulation is becoming a bit clearer each year, so again, the banking regulations in many countries are becoming clearer and dividends we expect from those sectors will be OK. Although I would say to diversify your regulatory risk. So some sectors have very high-banking yields and we are seeing, you know, some countries, the regulation is quite benign and other countries, it is getting a little bit more severe. So diversification is still key there.
And I would say the final thing I think that is probably underestimated is the potential impact of the U.S. tax changes on dividend growth coming forward for the U.S. this year. So we are still quite early in that. The announcement was only made a month and a half ago, the rules are only just becoming clear and so we are going to get a combination of lower tax rates, which means better cash flow for domestic earners and then also we are getting potential for repatriation, some of it will go in M&A, some of it will go in capital expenditure, some of it will go to pay down debt, but we are seeing first signs of some people saying some of it will come back in dividends.
So I think the outlook for equity income from an income-generation point of view is good. I think we are seeing a very wide range of opportunities. The market has sold off some areas, somewhat indiscriminately in some cases, and so there is better value available in areas like consumer staples, like utilities, like real estate, than there were a few years ago. At the same time, areas like oil, commodities and financial services are seeing much better environment than they saw two or three years ago. So the opportunity set is very wide and we are quite excited by that.