Investors should be mindful of structural challenges posed to income generation as a result of rapid thematic change.
- The development of effective Covid-19 vaccines is a pivotal moment.
- The vaccines will enhance management teams’ visibility.
- Improved visibility could lead to the reinstatement of both forward-earnings guidance and dividends.
After a year that has been dominated by the uncertainty generated by the Covid-19 pandemic, which has benefited growth stocks – given the structural tailwinds they benefit from, and the perceived earnings certainty they enjoy as a result – the announcement of three potentially effective vaccines marks a significant change in the outlook. There are still questions that need to be answered, such as how governments will roll the vaccines out and how long they will be effective for, but markets have been buoyed by the news. It should enable market participants to look through the pandemic-related disruption and focus on the economic recovery that is underway as a result of the enormous fiscal and monetary stimulus that has been applied to economies. This policy unification, whereby quantitative easing is no longer matched by austerity policies, represents a significant development of our ‘state intervention’ theme, a development that had begun ahead of the pandemic, but one that has moved forward dramatically during the crisis.
The vaccines will enhance management teams’ visibility into the end of this recession and might also be the catalyst for a return in management confidence, leading to the reinstatement of both forward-earnings guidance and dividends, reversing some of the cuts that we have seen this year. In addition, economic normalization should lead financial regulators in Europe to allow banks and insurance companies to resume dividend payments.
Overall, we are encouraged by the dividend trends that we have seen during the last two rounds of company results, with fewer cuts coming through, and several companies which had previously suspended their dividends announcing a resumption of payments. We believe that this will be the catalyst that brings investors back to dividend stocks and gives them the confidence to take advantage of the undoubted valuation opportunity presented by the dramatic outperformance of growth stocks.
Rapid Thematic Change Poses Structural Challenges to Income Generation
The dividend distribution from the global index is expected to be down 16% in 2020 relative to 2019, but income will return. However, not all companies will be able to restore dividends to previous levels, as the pandemic has accelerated some of the key themes that were in already in place.
Trends identified by our ‘smart revolution’ and ‘Earth matters’ themes have clearly accelerated. The office environment may never be the same again, international business travel will surely be reduced in favor of technology-driven alternative methods of communication, and a number of major oil companies have accelerated their transition to renewable rather than hydrocarbon-based sources of energy. Income funds will need to be mindful of the structural challenges posed to income generation as a result of this rapid thematic change.
One key consideration is whether the unification of fiscal and monetary policy will help to end secular stagnation, and finally be the catalyst that shifts the world from deflation to inflation. There is no doubt that the pandemic has delivered a profoundly deflationary shock, but the scale of the response is also unprecedented beyond world wars. It is likely that, over the medium term, inflation will start to rise, and while central banks are likely to intervene to prevent bond yields rising dramatically, we may begin to see a change in the shape of the yield curve to the benefit of financial stocks. The financial sector has been one of the hardest hit by the pandemic, leaving some companies at levels we think are broadly attractive.
To navigate such a challenging backdrop, and with volatility likely to be elevated, we believe following an active, disciplined approach that emphasizes quality and sustainable income should serve investors well.
Any reference to a specific security, country or sector should not be construed as a recommendation to buy or sell this security, country or sector. Please note that strategy holdings and positioning are subject to change without notice.
This is a financial promotion. Issued by Newton Investment Management Limited, The Bank of New York Mellon Centre, 160 Queen Victoria Street, London, EC4V 4LA. Newton Investment Management Limited is authorized and regulated by the Financial Conduct Authority, 12 Endeavour Square, London, E20 1JN and is a subsidiary of The Bank of New York Mellon Corporation. 'Newton' and/or 'Newton Investment Management' brand refers to Newton Investment Management Limited. Newton is registered in England No. 01371973. VAT registration number GB: 577 7181 95. Newton is registered with the SEC as an investment adviser under the Investment Advisers Act of 1940. Newton's investment business is described in Form ADV, Part 1 and 2, which can be obtained from the SEC.gov website or obtained upon request. Material in this publication is for general information only. The opinions expressed in this document are those of Newton and should not be construed as investment advice or recommendations for any purchase or sale of any specific security or commodity. Certain information contained herein is based on outside sources believed to be reliable, but its accuracy is not guaranteed. You should consult your advisor to determine whether any particular investment strategy is appropriate. This material is for institutional investors only.
Personnel of certain of our BNY Mellon affiliates may act as: (i) registered representatives of BNY Mellon Securities Corporation (in its capacity as a registered broker-dealer) to offer securities, (ii) officers of the Bank of New York Mellon (a New York chartered bank) to offer bank-maintained collective investment funds, and (iii) Associated Persons of BNY Mellon Securities Corporation (in its capacity as a registered investment adviser) to offer separately managed accounts managed by BNY Mellon Investment Management firms, including Newton and (iv) representatives of Newton Americas, a Division of BNY Mellon Securities Corporation, U.S. Distributor of Newton Investment Management Limited.
Unless you are notified to the contrary, the products and services mentioned are not insured by the FDIC (or by any governmental entity) and are not guaranteed by or obligations of The Bank of New York or any of its affiliates. The Bank of New York assumes no responsibility for the accuracy or completeness of the above data and disclaims all expressed or implied warranties in connection therewith. © 2020 The Bank of New York Company, Inc. All rights reserved.
In Canada, Newton Investment Management Limited is availing itself of the International Adviser Exemption (IAE) in the following Provinces: Alberta, British Columbia, Ontario and Quebec and the foreign commodity trading advisor exemption in Ontario. The IAE is in compliance with National Instrument 31-103, Registration Requirements, Exemptions and Ongoing Registrant Obligations.