What's The Market Not Seeing?

Global equity income

What's The Market Not Seeing?

Dividends stocks could emerge as market leaders after a prolonged period when high-quality momentum stocks have outperformed.

Seeing past the blind spot

Over the past ten years, central banks – in a bid to stimulate anaemic economic activity through the provision of abundant liquidity – have borrowed from the future, resulting in an extraordinary boost to asset prices. As a consequence, a large slice of the equity returns in recent times has come from the market being willing to pay more for risk assets, expanding their valuations in search of ever-more elusive returns.

This is unusual and we believe that future stock market returns are unlikely to look as attractive going forward. For us, this remains a fundamental blind spot for most investors. We believe that dividends will once again revert to producing a large slice of the future stock market returns.

Right now, dividend-producing companies have never looked more attractive.
Mark Whitehead

Investors, in our view, should therefore focus on high-quality, sustainable dividend payers supported by earnings growth to give themselves the best chance of outperforming markets going forward.

Right now, dividend-producing companies have also never looked more attractive. This is particularly the case versus fixed income which offers little yield and zero income growth by comparison, and which is why we believe equity income as a strategy is going to be highly relevant for investors in the years ahead.


Demographic change

As long-term investors, our focus is on companies that are able to generate sustainable returns far into the future. In particular, we target the kinds of businesses benefiting from long-term secular trends which are likely to shape economies and markets for many years to come.

As such, demographic change will continue to feature strongly in our research agenda during 2020. Specifically, we remain excited by the raft of opportunities that arise from the huge growth of the emerging market middle class. From an investment perspective, it’s not only the scale of this growth trend that we find compelling, but also the diversity it presents. We see this theme playing out across a whole range of verticals, from Asian air travel and the rise of financial services, to luxury goods and increases in discretionary spending. Important sub-themes relating to demographic change will also be a notable focus, including health and nutrition, urbanisation and infrastructure spending.

Technology and ESG

More generally, the future of technology is of significant interest. Robotics and automation, artificial intelligence, data consumption, memory demand, the roll out of 5G and the Internet of Things are all areas we believe will see rapid and disruptive development.

We also consider our integrated environmental, social and governance (ESG) approach to be a source of advantage in looking to identify sustainable growth opportunities before the market does and to be able to reflect and act on emerging ESG risks such as changing consumer preferences and heightened regulatory risk before they impact the value of our investments.

Our approach is to identify companies that have strong environmental, social and governance policies and whose sustainability practices will drive revenues, profitability and cash flows. These companies will most likely be aligned with a low carbon, equitable, healthy and safe society and reward shareholders with a growing dividend and strong total returns over the long term.


Dividends to the fore

In the US, economic activity has been waning, principally caused by the trade issues with China. There are green shoots in the negotiations, but as the tensions have escalated and tariffs have affected supply chains and product-price inflation, the economy has slid closer to recession territory. It is likely the US Federal Reserve will continue to provide liquidity to the US dollar, funding markets and cutting interest rates further to stimulate activity which should boost the economy in 2020. It is also rumoured that President Trump may try to transact a large tax cut for middle income Americans to garner support for his re-election. This should underpin equity markets with consumer sectors set to benefit the most.

The UK is now looking very likely to exit the EU at the end of January with a withdrawal deal in place. However, there is the wrinkle of a general election hurdle first which could still cause some volatility in UK and European stocks. But, as we edge closer to the end of January and an orderly withdrawal looks the most likely outcome, sterling should strengthen and with it those stocks that have a high correlation to the currency.

Dividends as a style should do better after a prolonged period when high-quality momentum stocks have outperformed.
Mark Whitehead

Sectors such as autos, insurance and capital goods could do well as a result. We should also see some better performance from those companies with a UK domestic focus as many are trading at appealing valuations versus their own history. But we do need to see a resurgence in capital investment in Europe to ensure that productivity and corporate earnings rebound to drive stocks higher over the longer term.

Brexit certainty should bring with it a relief surge of economic activity, leading to European macroeconomic indicators bottoming out and rebounding particularly in the manufacturing PMIs. Some fiscal stimulus maybe required by countries such as Germany which currently find themselves bogged down in a technical recession. A pickup in activity that results from this could lead to a more sustained equity style rotation – dividends as a style should do better after a prolonged period when high-quality momentum stocks have outperformed.


5G is the fifth generation of cellular network technology.

"Brexit" is a shorthand term referring to the UK vote to exit the European Union.

Correlation is a statistical measure of the relationship between two sets of data. When asset prices move together, they are described as positively correlated; when they move opposite to each other, the correlation is described as negative or inverse. If price movements have no relationship to each other, they are described as uncorrelated.

Emerging markets (EM) are nations with social or business activity in the process of rapid growth and industrialization. These nations are sometimes also referred to as developing or less developed countries.

The European Union (EU) is an economic and political union established in 1993 by members of the European Community. The EU now comprises 28 countries after its expansion to include numerous Central and Eastern European nations.

The Federal Reserve Board ("Fed") is responsible for the formulation of U.S. policies designed to promote economic growth, full employment, stable prices, and a sustainable pattern of international trade and payments.

The Internet of Things refers to the interconnection via the Internet of computing devices embedded in everyday objects, enabling them to send and receive data.

Purchasing Managers Indexes (PMI) measure the manufacturing and services sectors in an economy, based on survey data collected from a representative panel of manufacturing and services firms. PMI greater than 50 indicated economic expansion; below 50, contraction.

The British pound sterling is the currency of United Kingdom.


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Outperformance does not imply positive results.

Forecasts are inherently limited and should not be relied upon as indicators of actual or future performance.