In this week’s bulletin:
- Investors’ confidence boosted by improving outlook for eurozone and hopes of ECB intervention sees Spanish bond yields fall.
- IMF urges Chancellor George Osborne and the Bank of England to do more to stimulate growth as US banks observe that the global economy is moving into recovery phase.
- UK dividend payments hit a record high in the third quarter, with further growth forecast for 2013.
- Improving outlook for eurozone boosts investors’ confidence
- Falling Spanish bond yields boost global equities
- Japanese stock market leads the way despite falling exports
After stuttering the previous week, global stock markets got back onto the front foot last week as an improvement in sentiment for eurozone periphery government debt, coupled with improving economic data, boosted confidence that global growth will pick up in the fourth quarter and early 2013. Investors took the view that, whilst there was some disappointment about a lack of progress over Spain at the EU summit, Europe is slowly chipping away at its sovereign debt problems following EU leaders’ agreement to a clearer timetable for the creation of a single bank supervisor. Here in the UK there was good news on the inflation front: consumer price inflation dropped to 2.2% last month, its lowest since November 2009 and down from its high of 5.2% a year ago. There is also a growing conviction that Britain should shake off the double-dip recession this week, with economists taking the view that third-quarter GDP data will show a resumption of growth. City forecasters predict the economy will have grown anywhere from 0.4% to 0.8% after two quarters of decline. Even if proved right though, it will mean that the UK economy is still bumping along the bottom with low growth being eked out, aided by reduced inflation, rising employment and some earnings growth.
By the end of the week, most of the world’s major share indices had managed to register sizeable gains: the Dow Jones Global Index rose 2% on the week. Leading the charge was Tokyo where the Nikkei 225 Index surged 5.49% which, given the news backdrop, surprised some. Exports from Japan fell more than expected in September, as sales to China and Europe dropped and demand at home, led by rebuilding from last year’s earthquake, lost momentum. The Ministry of Finance in Tokyo revealed that exports fell 10.3% in September compared with a year ago, and they were down for a fourth consecutive month, raising fears that Japan could slide back into recession. In response to the news, Japan’s Prime Minister Yoshihiko Noda has ordered his cabinet to draw up fresh stimulus measures in a bid to spur economic growth. The stimulus package is to be compiled by next month; and whilst he did not give details on how large it would be, Finance Minister Koriki Jojima commented, “Considering what the government and the central bank are forecasting, I doubt we can simply stand by and let the economy continue as it is.”
“The rescue is coming!”
- Spanish bond market rallies on hopes of ECB intervention
- Signs of capitulation from Spain raise hopes of request for help
“Once the buying starts I think Spain’s yields will fall even further.”
Ed Yardeni, Yardeni Research
The rescue is coming, at least according to posters displayed around Madrid last week. These hopes proved to be a tonic for the Spanish bond market where government borrowing costs fell to their lowest level in over six months. Matters were helped by rating agency Moody’s surprise decision to spare the country’s credit rating being relegated to ‘junk’ status. This aside, it is the expectation of imminent and aggressive intervention by the European Central Bank (ECB) that is supporting the bond market. “You don’t bet against someone with unlimited money to spend” commented Ed Yardeni, referring to the ECB’s promise to “do whatever it takes” to maintain the stability and survival of the euro. After shunning Spain’s bond market for most of this year, some intrepid institutional investors are being enticed back into the market ahead of the ECB’s likely buying programme. At the recent EU summit, not only was there a decision to press ahead with banking union but also recognition that bad assets held by Spanish and Irish banks (mostly property related) would not be cleaned up by the eurozone’s new €500 billion rescue fund, the European Stability Mechanism (ESM). This has been a sticking point for Spain which had hoped it could offload onto the ESM some €40 billion of finance used to prop up its stricken banks. However, in a sign that Spain may be about to capitulate, its prime minister Mariano Rajoy was quoted as saying, “It’s not the most important pre-occupation of the Spanish government.” So the path to rescue seems clearer and even amid the country’s recession-hit economy there are some hopeful signs: labour costs are falling and the current account deficit is falling sharply. All that remains now is for Mr Rajoy to step up to the plate and ask the ECB for help, however ignominious that may be.
Less is more
- IMF says George Osborne should concentrate on stimulating growth
- Financial Services Authority chairman warns on QE
Less is more, according to the International Monetary Fund (IMF), which last week advised Chancellor George Osborne to ease off austerity and face up to the UK’s growth challenge. “Our view has been that doing nothing is not a good answer given the problems that could arise when very, very low growth becomes entrenched,” said the IMF’s First Deputy Managing Director, David Lipton. He also said the Bank of England (BoE) should be more creative about the way it used its QE programme by buying assets other than gilts. The challenge for the government is to balance the need for growth stimulation while maintaining confidence in the money markets about its debt reduction programme. The Chancellor has already extended the £123 billion deficit-reduction programme by two years to 2017 and is likely, according to the IMF, to have to repeat the exercise. The IMF is not alone in calling for the BoE to change tack, albeit with a different end objective. Lord Turner, chairman of the FSA, said other ways need to be found to stimulate the economy. His view was that printing more money would have a “declining marginal impact” and threatened the stability of the economy, and warned that QE had left Britain facing a “liquidity trap”.
Green shoots espied
- US banks see global economy moving into recovery phase
“When the IMF turns gloomy, it is usually safe to bet on sunny uplands.”
Simon Ward, Henderson Global Investors
As discussed previously, the IMF’s latest prognosis for the global economy appears somewhat gloomy as it points to problems in Europe, a slowing emerging world and the possibility of a ‘fiscal cliff’ event in the US. However, it seems that many global banks are taking a contrarian view, betting that the IMF has missed the turning point in the economic cycle. According to the likes of Goldman Sachs, a burst of monetary and fiscal stimulus has begun to re-ignite the likes of Asia and Latin America. The bank said its Global Leading Indicator – its in-house early warning system – has moved into the “recovery phase”, with its US indicator registering a jump in the US economic growth rate in September from just 0.5% to 2.4%. With worldwide PMI manufacturing indices rising, Korean exports – seen as a proxy for China – are up for the second consecutive month. Coupled with better news from Brazil, following a cut in interest rates, this means Bank of America is similarly minded, saying all its global indicators “point to better news”. All this may help explain the rally in global stock markets which has been underway for some weeks now as investors take a more positive outlook.
On the up
- UK dividend payments hit a record high, up 10.4% in the third quarter
- Forecast for 2012 means dividends likely to surpass pre-crisis peak of £77 billion
- Dividend growth forecast for 2013 is 8.0%
“Given the lack of high-yielding alternatives, investors can be hugely relieved that equities are providing a decent income.”
Charles Cryer, Chief Executive Officer, Capita Shareholder Services
Dividend payments in the UK hit their highest quarterly total of £23.2 billion, up 10.4% in the third quarter compared with last year, according to Capita Registrars. Capita has increased its headline forecast for the full year by £300 million, which would push the total dividends for the year to £78.6 billion, including additional special dividends. This would surpass the pre-crisis peak of £77 billion, the previous record annual total. Despite the size of the payout, 10.4% was the slowest quarterly growth rate since the fourth quarter of 2010. For the first nine months of the year the total payout reached £64.6 billion, a headline increase of 17.1%, meaning that investors received more in the first three quarters of this year than they did in each of the full years 2007, 2009 and 2010.
Capita revealed that 226 companies paid a dividend in the third quarter, down from 228 in the same period last year. Among these, 173 increased, started or reinstated their payments, 36 cut or cancelled them and 11 kept them the same. Gross equity yields “continue to look attractive” compared with other investment alternatives, steady at 4.4% for the next 12 months, said the firm. Capita Shareholder Services’ CEO Charles Cryer said, “The volume of cash being distributed by UK companies is unprecedented. The total for 2012 will be almost one sixth higher than last year’s record £68 billion. Given the lack of high-yielding alternatives, investors can be hugely relieved that equities are providing a decent income.”
According to the Capita Registrars Dividend Monitor Report, the single biggest dividend payer in the second quarter was Vodafone, paying a massive £3.5 billion final dividend. The top five companies, which accounted for 37% of the total paid out, were Vodafone, Shell, HSBC, BP and National Grid. These five companies distributed £8.6 billion in the third quarter. The biggest cash increases came from mining and oil and chemical companies. Cyclical sectors increased their dividends by 25% in the first three quarters of the year, three times as fast as the 8.3% rise in payouts from defensive companies. But in a cautionary note, Mr Cryer added, “Dividends cannot grow rapidly forever against the slower global economic backdrop, so the rapid increases of the last year or so may now be slowing down.” Notwithstanding this, Capita’s underlying forecast growth rate next year is still 8%.