Difficult backdrop, but market to grind higher


Martin Cholwill, Senior Fund Manager

20 February 2018

We believe extended political and economic uncertainty is likely in the UK, which could affect consumer spending & investment. Sterling bounced recently but remains competitive versus the US dollar in a long-term context, which should help UK stocks. Wage growth has been struggling to keep up with inflation, and we are cautious on consumer spending for 2018 (though we do not foresee anything disastrous). US fundamentals also appear strong, which could explain why 10-year bond yields have been rising. Robust wage data were behind the recent US stock market correction, we believe (but should not be a prelude to a bear market).
 
The Bank of England is looking for steady economic growth, and we agree with this view, albeit thinking that this growth will be somewhat anaemic, and the Fund is positioned accordingly. 
 
We expect the stock market to go higher this year despite occasional volatility and corrections. We believe UK dividend yields will be an attractive feature this year – with consensus forecasts pointing to reasonable dividend support in both 2017 and 2018, which should underpin the market. For income investors still looking at very low interest rates, equity dividends remain an important source of income. However, finding the right stocks that will pay sustainable dividends is difficult: only around 30% of UK stocks have a dividend yield higher than that of the overall market. We are still seeing dividend cuts and when these take place, the falls tend to be sharp. The RL UK Equity Income Fund remains a stock-picking fund, but certain themes are evident – such as a bias to companies with strong balance sheets and market positioning and those that have access to faster growth outside the UK. We also like companies that can benefit from the growing power of the grey pound. We continue to avoid companies that we view as more exposed to risk of political intervention or those where we feel that dividends may be at risk, such as those where these are paid from debt rather than cashflow.
 
To hear more from Martin Cholwill’s recent webinar or any other recent RLAM webinar, please click here. 

We believe extended political and economic uncertainty is likely in the UK, which could affect consumer spending & investment. Sterling bounced recently but remains competitive versus the US dollar in a long-term context, which should help UK stocks. Wage growth has been struggling to keep up with inflation, and we are cautious on consumer spending for 2018 (though we do not foresee anything disastrous). US fundamentals also appear strong, which could explain why 10-year bond yields have been rising. Robust wage data were behind the recent US stock market correction, we believe (but should not be a prelude to a bear market). 

The Bank of England is looking for steady economic growth, and we agree with this view, albeit thinking that this growth will be somewhat anaemic, and the Fund is positioned accordingly.  

We expect the stock market to go higher this year despite occasional volatility and corrections. We believe UK dividend yields will be an attractive feature this year – with consensus forecasts pointing to reasonable dividend support in both 2017 and 2018, which should underpin the market. For income investors still looking at very low interest rates, equity dividends remain an important source of income. However, finding the right stocks that will pay sustainable dividends is difficult: only around 30% of UK stocks have a dividend yield higher than that of the overall market. We are still seeing dividend cuts and when these take place, the falls tend to be sharp. The RL UK Equity Income Fund remains a stock-picking fund, but certain themes are evident – such as a bias to companies with strong balance sheets and market positioning and those that have access to faster growth outside the UK. We also like companies that can benefit from the growing power of the grey pound. We continue to avoid companies that we view as more exposed to risk of political intervention or those where we feel that dividends may be at risk, such as those where these are paid from debt rather than cashflow. 

To hear more from Martin Cholwill’s recent webinar or any other recent RLAM webinar, please click here

Past performance is no guide to the future. The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. The views expressed are the author’s own and do not constitute investment advice.