With market volatility appearing to have subsided recently and its Covid-19 vaccination programme being one of the most successful (more than 75% of adults are now fully vaccinated), the outlook for the UK’s recovery is looking brighter by the day.
After years of being unloved and significant underperformance, the first half of 2021 has seen a much-needed bounce-back for UK equity markets. Year-to-date the UK is up 14%, in line with Europe and only slightly behind the US’s return of 19%. China and Japan meanwhile, are down 14% and 0.4%.
Total net retail sales within the UK’s fund market for the first half of 2021 were £2bn, the highest since 2017, according to the Investment Association, while the majority of UK equity income trusts are trading on smaller discounts, compared to recent years.
This may well be a result of simply turning around the horrendous market downturn of 2020, courtesy of the coronavirus pandemic, but this new positive trajectory coupled with increasing M&A and the return of a number of companies paying dividends has given investors a moment to breath.
While the UK dividend recovery is still lagging the global trend, which according to Janus Henderson’s latest global dividend index is close to pre-pandemic levels, things are definitely looking better with UK dividends rising sharply by 61% in Q2 alone.
Aggregate dividend forecasts for the FTSE 100 in 2021 have already advanced for three consecutive quarters, lifted by more optimistic forecasts for miners, banks and oil majors.
Royal Dutch Shell, for example, has promised higher cash returns to shareholders for the second half of the year and is already set to be the fourth-highest individual dividend payer in cash terms in the FTSE 100 this year, paying more than 5% of the forecast total for the entire index.
These figures are being lapped up by income-seeking investors and income-paying UK investment trusts, which have suffered considerably over the past three to five years. Today, the average UK equity income trust is yielding 4.40%.
Henderson High Income, which actually sits in the UK Equity & Bond Income sector, currently offers a very attractive yield of 5.60%. Its manager, David Smith, believes there is plenty more upside to come in the form of an economic recovery and that the UK is still home to one of the cheapest equity markets of the developed world, making it an appealing play for investors.
He also says the outlook for M&A activity in the UK is stronger than it has been in years and the numbers back this up. According to M&A data and analytics platform Mark to Market, the first quarter of 2021 saw a total of 1,466 M&A deals, which was higher than deal volume pre-lockdown.
Meanwhile, inbound M&A (that is, M&A investment from overseas) has also increased significantly despite ongoing lockdown measures and travel restrictions. £58.7bn of inbound M&A was recorded in Q1 2021, more than three times the £18.6bn figure seen in Q1 2020.
So will this bounce-back settle into something more permanent or is it short-lived? Nothing is certain and it depends on whether you look at the glass as half-empty or half-full.
Brexit confusion has moved on but left in its place a whole host of challenges across different industries. But company numbers are looking better than they have in months, some in years. As is always the case, all we can do is sit and wait.
David was our guest on this week’s edition of The Friday Show so if you want to hear more on his thoughts on the UK recovery and how it’s impacting Henderson High Income, you can watch it back here.