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The Big Picture THE BIG PICTURE: DIVIDENDS COULD DRIVE UK EQUITY COMEBACK


YIELDS TO HELP LONDON SHARES STAND OUT


10,00% 15,00% 20,00% 25,00% 30,00% 35,00% 40,00% 45,00% 50,00%


0,00% 5,00%


UK Europe ex UK Japan World US One-year forward price/earnings ratio, premium to 10-year average (LHS)


Emerging markets


Asia ex Japan Dividend yield (RHS) Source: Refinitiv/Fidelity/MSCI


0,00% 0,50% 1,00% 1,50% 2,00% 2,50% 3,00% 3,50% 4,00% 4,50%


Dividends could help UK equities stand out on the global stage again, says Mona Dohle.


The government wants to make UK equities sexy again. It needs to. For years London has faced increasing competition from New York and Hong Kong for new listings, but the UK’s departure from the European Union has added Amsterdam to the list, which this year became the share trading capital of Europe.


A report by Lord Hill made several recommendations on how to make London a more attractive market to raise capital, including allowing dual class share structures on the main market and relaxing the rules for listing special purpose acqui- sition companies (Spacs). Modernising the City is overdue. Even before Brexit, investors enjoyed better returns elsewhere as the value focus of UK stock market indices dragged returns down.


Indeed, for more than 10 years, stocks in the MSCI UK All Cap index, which has a bias towards financials and consumer sta- ples, underperformed the MSCI World. Last year, the UK index contracted by -11%, while the MSCI World All Caps grew by almost 13%.


While many schemes once had an equity home bias, most have now turned their backs on UK plc. In 2008, the average defined benefit (DB) pension scheme allocated almost half its equity portfolio to domestically listed stocks, but last year this slumped to a mere 13.3%, according to the Pension Protection Fund. This trend is partly the result of the dominance of growth stocks in US indices, making them more attractive than the FTSE, which has a bias towards large financial and energy stocks. Yet in the final quarter of last year, UK equities returned 14.8%, according to Refinitiv. A modest comeback for value stocks and growing interest in financials and energy stocks were behind the rally. But another factor that could help UK stocks make a comeback is that the FTSE offers higher dividends. As of late February, the MSCI UK All Cap had a dividend yield of 2.8%, compared to 1.72% for the MSCI World. Throughout the past year, many listed firms either cut or halted their dividends, partly due to a PRA ban on banks making such payments. But with the ban now lifted, research by Sharecast and Refinitiv predicts a dividend rise of more than 3% for FTSE100 firms, with utilities and financials expected to show the strongest dividend growth.


Issue 102 | April 2021 | portfolio institutional | 11


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