What can we expect in terms of the investment landscape for the next 6 months, and what longer-term trends, if any, can be identified beyond 2016.
The second half of 2016 is set to be an intriguing time for spotting investment trends, especially with political noise around upcoming presidential elections in the US and France, the Fed flirting with a rate hike and the inevitable background commentary on the timing of Brexit. Looking at the wider investment context, there are a number of possible considerations that investors and advisers should account for.
Dividends: payout cuts, or sterling windfall?
The dividend payout ratio for FTSE 100 companies passed 70% in May, suggesting that major companies could be forced to cut dividends if faced with challenges later in the year. Research at by Canaccord identified a number of FTSE companies likely to do so at the next opportunity (including Vodafone, Diageo and Rio Tinto). Investors were warned to be aware of this as a possible reason to avoid the FTSE 100 as a dividend investment.
Sterling’s devaluation in recent weeks, however, offers shareholders an opportunity. With some 40% of UK listed companies declaring dividends either in dollars or euros, UK investors are well set for returns in sterling. That said, more dividend cuts have been seen from several major banks and miners where low interest rates and weak commodity prices continue to hurt profits.
Low rates, low returns
Consistently low interest rates have had an impact across all investments since 2008. We are likely to continue to see this in the headlines in the UK after a number of high profile pension schemes have struggled to meet their obligations. Some commentators have claimed that this is disrupting the ability of the market to allocate capital effectively. According to Blackrock, some 70% of bonds in developed-market government bond indexes offer yields of 1% or below – a situation reflected across much of the traditional investment avenues. This means investors will end up hunting for any project with a positive yield.
In this low-return economic environment, alternative investments are an attractive option. We could see alternatives become a more prominent investment trend in the second half of 2016.
Global developments
The US economy continues to grow, entering what Lombard Odier identified as the “mature stage of its seven year cycle” increasing the likelihood of action from the Fed to change monetary policy. This would be signal a marked shift in developed market economic direction as the ECB, Japan and UK continue to point to further easing. Emerging markets have also enjoyed a strong rally led by currencies and a search for yield.
While this macroeconomic backdrop might not be relevant to all investment decisions over the coming months, this context should definitely be kept in mind when taking any investment decision.
Sam Plumptre, Chief Executive Officer, CoInvestor