Franklin Templeton Insights: Living on “COVID” Time

The coronavirus has forced a number of behaviour changes throughout societies across the globe, including how we work, shop and interact with others. Head of Equities at Franklin Templeton, Stephen Dover discusses how it has impacted investor decisions, too.

We are all globally on “COVID time” now as we have never seen as swift a change in our society, culture and economy as that caused by the coronavirus. Here are some points for investors to ponder.

  • Investors are experiencing uncertainty more than risk in their portfolios: The markets have shown record daily volatility. At the same time, price movements in different asset classes (except US Treasuries) have been highly correlated  because the markets are dealing with uncertainty. Market volatility will likely abate once COVID-19’s length and magnitude are understood.
  • It’s bad, but not The Great Depression (TGD): During TGD, policymakers tightened monetary policy, misdirected fiscal aid, raised trade barriers, tried to reduce fiscal spending and increased the regulatory burden on banks and industry. Policymakers have learned from those mistakes; the current global response to the coronavirus is at least less likely to make matters worse.
  • Cash is king for companies and investors: Investments of all kinds are being indiscriminately sold to raise cash. Money-market fund assets and flows are at all-time highs. To survive the freefall in their incomes and cash flow, companies are strengthening their balance sheets. Companies will need stronger balance sheets and individual investors will need larger “rainy day” accounts.
  • Company earnings forecasting in the fog of war: Most companies cannot predict earnings in this volatile environment. Current earnings projections for a least the next two quarters are overstated and will be revised downward. Investors should look past this and base company valuations on a longer-term earnings outlook, balance sheet strength and cash flow quality.
  • Stock buybacks will slow in the United States: Buying back stock increases a company’s earnings-per-share (EPS), because there are fewer shares. So, we will likely see reduced EPS growth rates as well as flows into equity markets for the next few years; stock buybacks averaged about 40% of the flow into the US equity market in 2019. I anticipate there will also be a slowdown in dividend growth, and we will likely see cuts in some dividends.
  • Fiscal deficits as far as the eye can see: Globally, the COVID-19 serves as a catalyst for Modern Monetary Theory (MMT)-style policies that are not concerned about the size of fiscal deficits. The risk is that once these “temporary” policies are introduced, they may become permanent. When the economy starts to recover, there likely will be increases in taxes, including on capital gains. Investors should take into consideration the current low tax rates and likely future higher tax rates into their portfolio decisions.

In a world where bond yields are at or below zero and there is massive fiscal spending, equities should outperform dramatically in relative terms. The recent indiscriminate equity selloff has left pockets of relative value for investors.

Asian equities, especially Chinese equities, have outperformed many other markets this year, and the recent rise in the US dollar has also made foreign stocks relatively less expensive. Global technology companies and Chinese internet companies should see their competitive market position further strengthened by the current shutdown as the entire world learns to both work and live remotely.

 


 

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Liontrust Insights: What is the outlook of US dividends?

George Boyd-Bowman, fund manager at Liontrust, shares his views in a short article below.

Investors should be braced for companies suspending dividends in the US during the current crisis. But we believe that the extent of dividend cuts in the US may be less severe than in the UK, and companies on the other side of the Atlantic could play a more important role in providing portfolio diversification for income investors in the future. 

We have seen a slew of announcements in the UK which have led some analysts to suggest dividends for the UK market as a whole could fall by as much as 50%, or possibly more if the dividend futures markets are to be believed.

Secondly, US companies tend to pay dividends on a quarterly rather than half-yearly basis, so each quarterly payment is a smaller chunk of increasingly stretched working capital.

Finally, US companies have typically chosen to have a more balanced method of returning capital to shareholders, with buybacks the more variable tool on top of a steadier dividend.

Thus, it will be buybacks that will be foregone first. We have seen this already with the largest banks suspending buybacks for the time being.

There is an interesting debate about whether companies which, on most normal metrics, wouldn’t need to suspend dividends should indeed do so. In a “normal” environment, the signalling effect of not continuing to pay a dividend, which shareholders typically feel is either implicitly or explicitly promised, would be extremely damaging.

We are not convinced that companies (and their share prices) will be punished in the same way during this crisis. In a world where corporate social responsibility is increasingly important, witness the substantial rise of investor interest in ESG and sustainability, companies could well be seen to be doing their bit by conserving cash flows and preserving employment.

Should some US companies choose to temporarily suspend dividend payments, we don’t believe this alters the medium and long-term potential for the US to become an increasingly important source of dividend income for UK investors. The lower pay-out ratios will allow future dividend growth rates to be sustainably much higher.

While suspended dividend payments are likely to be transitory, perhaps one more structural outcome of the COVID-19 crisis will be that UK investors will reduce their over-reliance on UK companies to produce their ever-important dividend income. The US has a big(ger) part to play in this. 

 


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The financial instruments discussed in the document may not be suitable for all investors and investors must make their own informed decisions and seek their own advice regarding the appropriateness of investing in financial instruments or implementing strategies discussed herein.

If you invest in this product you may lose some or all of the money you invest. The value of your investment may go down as well as up. A commission or sales fee may be charged at the time of the initial purchase for an investment and may be deducted from the invested amount therefore lowering the size of your investment. Any income you get from this investment may go down as well as up. This product may be affected by changes in currency exchange rate movements thereby affecting your investment return therefrom. The performance figures quoted refer to the past and past performance is not a guarantee of future performance or a reliable guide to future performance. Any decision to invest should always be based upon the details contained in the Prospectus and Key Investor Information Document (KIID), which may be obtained from MeDirect Bank (Malta) plc.

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