“It is also a headwind for UK equity dividend growth as some 23% of the entire UK dividend pot in 2016 came from the oil and gas sector which is dominated by giants BP and Royal Dutch Shell,” Hollands stated.
“Royal Dutch Shell, which earlier this week pleased the market by reporting a strong bounce in profits for the first quarter in part due to an average oil price of $54 per barrel, last year accounted for a staggering 13% of the entire UK dividend pool in 2016.
“The prospect of continued low energy prices also suggests that while inflation has been rising, the risk of problematic runaway inflation is an unlikely scenario.”
However, TwentyFour Asset Management CEO Mark Holman isn’t sure this new commodity slump will play out in the same way the collapse of the fourth quarter of 2015 did.
“The last slump was painful for markets and particularly uncomfortable in certain industries and for individual companies, but ultimately markets shook it off and everything recovered in what turned out to be a huge buying opportunity,” said Holman.
“Second time round, events tend to be more muted as the results from the first round have already been seen. We have mentioned before that everyone wants to buy the dip, which will further underpin the market in this case.”
The main difference separating this commodity slump from its predecessor is the confident outlook for global growth prospects.
On Friday, the US Bureau of Labor Statistics’ latest nonfarm payroll data showed the unemployment rate had dropped one-tenth of a percent to 4.4% over April, the lowest level since 2007.
Approximately 211,000 new jobs were created last month, exceeding the monthly average of 185,000 this year.
“This really is the first time since the global financial crisis that both developed and emerging economies are growing steadily in unison,” Holman said.
“So, for now this commodity sell off might be a short-term irritant and is certainly worth monitoring closely. But will it be the catalyst for a broader slump? We doubt it.”
