Total payouts for 2012 set to hit new cash record of £78.3 billion

In this week’s bulletin:

  • IMF warns of global slowdown and urges further growth stimulus by policymakers
  • US Federal Reserve chief says he is prepared to take further action
  • Spanish debt woes hit markets late in the week
  • IMF warns of need for more growth and potential risks of US ‘fiscal cliff’
  • Despite slower growth, UK inflation and unemployment fall: Olympics give welcome boost to job prospects
  • Valencia’s request for financial aid upsets investors – fears grow other Spanish regions will follow
  • Spanish bond yields exceed 7.5% as investors embark on flight to safety
  • UK shareholders enjoy record payouts from bumper dividend increases
  • Total payouts for 2012 set to hit new cash record of £78.3 billion, according to Capita Registrars

 

Market Eye

  • IMF warns of global slowdown and urges further growth stimulus by policymakers
  • US Federal Reserve chief says he is prepared to take further action
  • Spanish debt woes hit markets late in the week

Global markets got off to a good start last week as investors gave a sigh of relief that corporate earnings in the US and Europe were not as bad as many had feared. Sentiment was also boosted by hopes that the US Federal Reserve will ease monetary policy via a further dose of QE in coming months. Falling US retail sales and weak job growth in recent weeks has increased speculation that Fed Chairman, Ben Bernanke will once again inject further cheap money into the economy in the hope of stimulating growth. As ever, Mr Bernanke was giving nothing away in his recent testimony to Congress, saying last week that he was “prepared to take further action” but giving no indication of timescales. Notwithstanding this, investors are betting that, given the International Monetary Fund’s (IMF) warning over the weekend that risks to global growth loom large, more cheap money is on the way.

By Friday, though, worries once again resurfaced over eurozone debt problems. Despite approval by eurozone finance ministers of a €100 billion rescue package for Spain’s banking sector, a poorly received auction of Spanish government bonds pushed ten-year yields above the pivotal 7% level. Matters were exacerbated when the Spanish region of Valencia said it would request financial aid from Madrid and with the government’s forecast of continuing recession next year. Valencia is not the first of Spain’s autonomous regions to ask for help and is unlikely to be the last, as we discuss later. So by the end of the week these concerns weighed upon sentiment, leaving many leading equity indices to give up earlier gains, including London’s, closely followed by oil and metal prices. Unsurprisingly, investors’ loss of risk appetite meant there was a flight to quality, causing government bond yields in the US, UK and Europe (excluding the periphery) to fall to new lows. Indeed, investors are in effect paying half a dozen EU countries for the privilege of lending them money, as two-year bond yields fell below zero, including Germany and more recently Austria.

IMF Sirens

  • IMF warns of need for more growth and potential risks of US ‘fiscal cliff’
  • Despite slower growth, UK inflation and unemployment fall: Olympics give welcome boost to job prospects

In its latest regular update to its World Economic Outlook, the IMF has stated that the outlook for global growth has deteriorated and has cut its growth forecast from 3.6% to 3.5% this year. Whilst the downgrade is relatively minor, the caveat was that this depended on rapid action being taken by global policymakers to boost growth. A combination of eurozone turmoil and weaker growth in the developing economies has also been aggravated by the risk of the ‘fiscal cliff’ in the US. This fiscal cliff involves mandatory budget cuts automatically kicking in at the end of the year, coinciding with the expiration of Bush-era tax cuts. The two combined could potentially send the US back into recession unless policymakers agree new legislation to reverse these. With the US presidential election just months away, there is political paralysis on Capitol Hill with neither the Democrats nor Republicans prepared to give ground. The markets have though taken the view that after the election both sides will work to resolve this key issue.

The IMF has also cut its forecast for the UK to just 0.2% against the 0.8% predicted back in the Spring, believing Britain’s prospects to be far bleaker than it thought previously. This is despite the likely boost to the economy from the forthcoming Olympics – last week the latest job numbers showed that fewer people were unemployed, thanks in part to job creation in London as a direct result of the Games. There was good news on the inflation front too, with the official Consumer Prices Index (CPI) dropping sharply last month to 2.4%: less than half the rate at which it peaked last September. The fall increases the possibility that the Bank of England might, at long last, hit its official CPI target of 2% and also explains why it took a more relaxed view when deciding to resume its programme of QE earlier this month. Nevertheless, the prevailing view in the market is that Britain’s economy will have shrunk for the third consecutive quarter when figures are released later this week and that this is likely to lead to calls for the government to further stimulate the economy. Fortunately, recent business surveys have been a little more positive, suggesting that manufacturing is growing despite the weakness in the eurozone.

More Pain for Spain

  • Valencia’s request for financial aid upsets investors – fears grow other Spanish regions will follow
  • Spanish bond yields exceed 7.5% as investors embark on flight to safety

As mentioned earlier, fresh fears that other Spanish regions may follow Valencia in seeking a bailout from Madrid rattled the markets on Friday and these concerns have continued today across global stock markets. Over the weekend, a local newspaper in Murcia, one of Spain’s smallest regions, quoted the regional government’s head as saying it would ask for funding help of up to €300 million (£233 million). Many of Spain’s regions have high borrowing needs and speculation is growing that a number of them will follow Valencia and ask formally for money from Madrid, at a time when the central government itself is having trouble borrowing money.

Analysts said the developments in Spain had raised fears that the eurozone debt crisis was worsening and spreading to the region’s biggest economies. The worry now is that, given its debt woes, Spain may eventually need a bailout from the International Monetary Fund or the eurozone’s rescue fund; and that is driving investors away from the euro to relatively safer assets. This morning, Asian stock markets also fell amid fears that the ongoing debt problems in the eurozone will hurt the region’s own growth. The eurozone is a key market for Asian exports and there are concerns that demand from the region may decline in the near term. At the same time, a weaker euro has also added to the woes of Asian exporters, as it makes their goods more expensive for buyers within the eurozone.

So what went wrong with Spain? The country’s current plight illustrates the fact that the eurozone’s problems run far deeper than the issue of excessive borrowing by ill-disciplined governments. Portugal, Italy and Greece all clearly accumulated too much debt. But the Spanish government’s borrowing was under control – that is, it ran a balanced budget on average – every year until the eve of the 2008 financial crisis. And as Spain’s economy grew rapidly before 2008, its debt-to-GDP ratio was falling. Germany’s, by contrast, continued to rise. When Spain joined the euro, the Spanish government resisted the lure of cheap loans but most ordinary Spaniards and its banks did not. The country experienced a long boom, underpinned by a housing bubble, as Spanish households took on bigger and bigger mortgages. House prices rose 44% from 2004 to 2008, at the tail end of a housing boom, according to Ministry of Housing data. Since the bubble burst, they have fallen by 25%. From 1999 to 2007 the economy grew on average at 3.7% per year but since then has shrunk at an annual rate of 1%. So, although the Spanish government still had relatively low debts, it now has to borrow significantly to deal with the effects of the property collapse, the recession and the worst unemployment rate in the eurozone.

The Great Dividend Rush

  • UK shareholders enjoy record payouts from bumper dividend increases
  • Total payouts for 2012 set to hit new cash record of £78.3 billion, according to Capita Registrars

“Even without the record special payments, underlying dividend growth has surpassed our expectations with its strength.”

Charles Cryer, CEO Capita Registrars

Despite eurozone woes and the UK being in recession, shareholders are enjoying record-breaking dividends as profits at Britain’s largest companies shrug off a struggling economy. According to Capita Registrars, second-quarter payouts to shareholders surged by 18% to £22.6 billion. That means for the first half of the year a total of £41.4 billion has been paid out, an increase of 21% compared to a year earlier. Corporate behemoths such as Shell, HSBC, Vodafone and Glaxo are leading the way with dividend payments reflecting high profitability, lean costs and the companies’ global reach into emerging markets. Commenting on the bumper payouts, Capita’s CEO Charles Cryer said, “The worsening global and domestic picture has not dented the enthusiasm among British firms to pay dividends. Cash flow is still strong, yet corporate investment is very depressed. Even without the record special payments, underlying dividend growth has surpassed our expectations with its strength.” For the full year, dividends are set to hit a new cash record, up 15% on last year according to Capita. Adjusted for inflation, that exceeds the pre-crisis peak set in 2008 and means shareholders have enjoyed a real increase in payouts.

And it is not just here in Britain that investors in big blue-chip stocks have done well. Despite the euro crisis, America’s sputtering recovery and the possibility of a hard landing in China, Wall Street has weathered it. After a wobble in May and early June, New York’s benchmark index, the S&P 500, has moved back towards its April peak. The demand for large, defensive names is the catalyst behind the rally. With yields on US Treasuries hitting record lows, the appeal of big-dividend payers amongst investors is growing. Last week some of Wall Street’s bluest blue chips saw their share prices hit 52-week highs, including the likes of Disney, Pfizer and Johnson & Johnson. The latter has an impressive track record of dividend growth and is a constituent of the S&P Dividend Aristocrats, an index of companies that have increased their payouts for the past 25 years and which is trading at a record high. With a surge in results due this week, it may be a greater test for Wall Street as the earnings season steps up a gear but, irrespective of this, weight could be added to the ‘income for growth’ strategy that has worked so well for investors in the last few years

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