I believe the old saying goes that you can trust a crystal ball about as far as you can throw it. It’s always difficult (impossible?) to make predictions for financial markets, but the past year has made it even more so, given the unprecedented times we live in.
Nevertheless, about a month ago, I pointed to a stronger year for global equities in 2021, with hopes of a vaccine and an improved geopolitical outlook both acting as a catalyst to support that view. Equities have been strong, with the S&P 500 reasonably ahead of where it was pre-crisis, while China and Japan have also experienced a good run.
Mid-way through January and the waters look a bit more muddied – lockdown is, unfortunately, the buzzword in the UK and Europe again, and we must face the fact that any return to normality appears to be some time away.
Regardless of that, I still believe we can expect mid to high single-digit returns from equities in 2021, but there is one area where I do believe investors need to be even more cautious, namely the income space.
As we know, income investors have been in the eye of the storm. As the pandemic has continued it has significantly impacted the dividend-paying capacity of companies across the globe – with the UK, Europe and Australia among the worst affected*. Figures from the Janus Henderson Global Dividend Index for the third quarter of 2020 show that global dividends fell $55bn to $329.8bn on a year-on-year basis, an underlying fall of 11.4% – it added that expects global dividends to fall between 17.5% and 20.2% for the year as a whole*.
There is hope dividends could recover as fast as global equities tend to do in the aftermath of a recession – and we have seen some companies already begin re-instating dividend payments. But I’m wary of this being the case, not only because of the potential for a dividend reset (companies reinstating dividends to a more manageable and sustainable level, allowing them to invest more in a companies’ growth) but also because history shows dividend recessions can take longer to recover from.
I recently read a research note from Murray International Trust manager Bruce Stout who says that while markets have tended to recover quickly from a recession, the last six ‘dividend recessions’ the market has seen in the past 100 years have taken much longer to recover – adding that it takes roughly four to five years for companies to rebuild their balance sheets. He does add that this has occurred during periods of normal yield curves, which is not the case in the current environment**.
I agree to a large extent. The balance sheet destruction in certain sectors, like travel and leisure, has been unprecedented – some of these sectors will simply have to prioritise their balance sheets once we get some semblance of normality back in the global economy.
The one positive for investors is that in those past dividend recessions, most UK investors only had UK income stocks in their portfolios. Now they have a much bigger selection, with global equity income funds the obvious first port of call.
For example, while I mentioned the struggles of dividend payers in the UK, Europe and Australia, emerging markets and North America are proving more resilient – the latter is partly because US dividends are shielded by reduced share buybacks*.
Even the most bullish would not expect dividends to return to normal in the next 18-24 months, so a cautious approach looks the most sensible bet. This, coupled with the added diversification and potential for greater growth, makes global equity income funds a more attractive proposition in this climate.
A good example is the Fidelity Global Dividend fund, managed by Dan Roberts. Dan believes a portfolio of quality and defensive businesses, trading at a significant valuation discount, should underpin an attractive long-term total return. The fund has three key building blocks – first, whether the dividend is attractive (around 3%); second, if the team expects dividend growth in mid-single digits; and finally the team evaluates the impact of any valuation change in the portfolio and wider market.
Another option is the Guinness Global Equity Income fund, a portfolio of 35 equally-weighted stocks, with managers Matthew Page and Ian Mortimer given substantial freedom to entirely avoid countries and sectors they don’t like.
Those who prefer to go down the multi-asset route might consider the Artemis Monthly Distribution fund – managers Jacob de Tusch-Lec and James Foster invest in equities and bonds globally when building their 150-200 stock portfolio.
*Source: Janus Henderson Global Dividend Index Edition 28 – November 2020
**Source: Aberdeen/Standard website – Edison Research Note
***Source: Fidelity Perspectives – Looking for Resilience Amid Uncertainty
