Global Equity Income in 2023: Steady dividend growth and attractive valuations
Head of Global Equity Income, Ben Lofthouse, provides a recap of 2022 and discusses the outlook for the year ahead.
5 minute watch
- A positive for 2022 was the strength of dividend growth, mainly driven by larger companies with strong balance sheets. This led us to consistently upgrade our dividend expectations through the year.
- While the impact of higher rates has been reflected in stock prices, the full impact on consumers and the real economy has yet to be felt. We are wary of businesses that largely rely on debt to generate returns, including property and those that are non-cash generative.
- The outlook for 2023 looks good. Valuations are lower and some areas like energy and resources are still seeing high prices, while some financials will benefit from higher rates. Dividend cover remains historically high and the broadness of dividend growth suggests that it could continue into 2023.
[This video was recorded in late December 2022]
Impacts of higher inflation and interest rates yet to fully feed into the economy
Coming into 2022 there were a number of things we were worried about. One of them was rising interest rates and inflation. Rates have gone up this year and inflation has been very high. In terms of the things that we worried about was the de-rating of equity markets as rates went up. And also worries about the destabilisation of financial markets when interest rates went up maybe more rapidly than people thought. I think both those events have largely happened this year. In terms of interest rates going up, we feel we’re largely through that process. This is positive, the equity market is revalued to a large extent.
I think the part that hasn’t been affected yet in markets is the impact of higher rates on the real-world economy. We still remain wary of businesses that rely on debt to generate a large part of their returns, so being leveraged. That might include property areas, certainly areas that are more speculative, non-cash generative companies. We’re also not quite sure of the impact it might have on the consumer. So whilst wages are going up, which is good for the consumer, we haven’t seen the full reposting of rates for households and for corporates.
So on the positive side, valuations are lower, on the cautious side, just watch out for companies that perhaps have a bit too much leverage. Because we don’t expect rates going back down to the levels they have been over the last few years, and we do feel that change from central banks will take a while for markets to digest.
Inflationary pressures may abate but won’t disappear
Whilst we did anticipate interest rates going up this year, we certainly didn’t anticipate the conflict in Eastern Europe and the impact that it would have on energy markets. We’ve had the view for a number of years that the demand-supply balance within the energy market, in oil & gas, was tighter than perhaps the market anticipated, and that’s proved to be correct. It’s had a big impact on inflation, we’d hope to see inflation abating a bit, but we don’t see a return to the very low energy prices that we’ve experienced over the last decade, because of lack of investment. So, whilst we see inflation falling, we do see higher costs and higher energy prices being a factor that markets need to consider.
Potential for a China turnaround?
The last significant factor this year that we didn’t anticipate was that China would remain as impacted by COVID as it has done. We’ve seen many economies around the world, many countries around the world open in 2021, early 2022 after vaccination programmes. Certainly the route that China has taken has been very different. This has delayed its reopening but we do see that the potential for opening is there. And actually some of the recent news on China on its COVID zero policy has changed significantly.
So I think the wildcard for next year will be a more open China, and that will be positive for global growth, and certainly positive for Asian equities, which currently trade at very depressed valuations.
Positive outlook for global dividend growth
In terms of 2022, one of the very positive things has been the strength of dividend growth. We’ve seen a number of companies who rebased their dividends in 2020 with COVID have increased them again, companies generally in the large, listed area have got strong balance sheets. And we have consistently upgraded our dividend expectations this year.
The outlook for 2023 also looks good. Dividend cover remains high on a comparative historical basis. Areas like the energy market, the resources market, are still seeing high prices which leads through to strong cash flow. And in the financial services sector, whilst there are concerns around credit potentially from higher interest rates, many companies also benefit from higher interest rates. So some of these larger sectors are actually doing quite well. We often see in periods where you get rising rates that dividends are a large part of the total returns for equities over the following years. And certainly we would see that could be something that could happen from here.
Cautiously optimistic for 2023
So to conclude, there are still challenges for 2023, we remain cautiously optimistic that some of the things that weighed on markets this year, and weighed on economies this year such as China and energy might abate slightly. Valuations on a historical basis remain attractive and we haven’t seen a full unwind of the kind of value-growth dynamics that we’ve seen over the last few years. So, valuation of value portfolios still remains very low in a historical context. On top of that dividend growth looks good, and the broadness of that dividend growth suggests that it could continue into 2023.
Balance sheet: a financial statement that summarises a company’s assets, liabilities and shareholders’ equity at a point in time.
Equity market de-rating: occurs when investor sentiment becomes negative, for example when there are weaker prospects for corporate earnings growth.
Growth vs value investing/portfolios: value investors look for companies that they believe are undervalued by the market, and therefore expect their share price to increase, while growth investors search for companies with earnings that are expected to grow faster, and therefore anticipate the share prices will increase in value.
Leverage: a company with higher leverage typically has higher debt levels, which increases risk.
Equity securities are subject to risks including market risk. Returns will fluctuate in response to issuer, political and economic developments.
Energy industries can be significantly affected by fluctuations in energy prices and supply and demand of fuels, conservation, the success of exploration projects, and tax and other government regulations.
Financials industries can be significantly affected by extensive government regulation, subject to relatively rapid change due to increasingly blurred distinctions between service segments, and significantly affected by availability and cost of capital funds, changes in interest rates, the rate of corporate and consumer debt defaults, and price competition.
Natural resources industries can be significantly affected by changes in natural resource supply and demand, energy and commodity prices, political and economic developments, environmental incidents, energy conservation and exploration. projects.
These are the views of the author at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors. Any securities, funds, sectors and indices mentioned within this article do not constitute or form part of any offer or solicitation to buy or sell them.
Past performance does not predict future returns. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.
The information in this article does not qualify as an investment recommendation.
Please read the following important information regarding funds related to this article.
- Higher yielding bonds are issued by companies that may have greater difficulty in repaying their financial obligations. High yield bonds are not traded as frequently as government bonds and therefore may be more difficult to trade in distressed markets.
- The portfolio allows the manager to use options for efficient portfolio management. Options can be volatile and may result in a capital loss.
- Global portfolios may include some exposure to Emerging Markets, which tend to be less stable than more established markets. These markets can be affected by local political and economic conditions as well as variances in the reliability of trading systems, buying and selling practices and financial reporting standards.
- Where the Company invests in assets that are denominated in currencies other than the base currency, the currency exchange rate movements may cause the value of investments to fall as well as rise.
- This Company is suitable to be used as one component of several within a diversified investment portfolio. Investors should consider carefully the proportion of their portfolio invested in this Company.
- Active management techniques that have worked well in normal market conditions could prove ineffective or negative for performance at other times.
- The Company could lose money if a counterparty with which it trades becomes unwilling or unable to meet its obligations to the Company.
- Shares can lose value rapidly, and typically involve higher risks than bonds or money market instruments. The value of your investment may fall as a result.
- The return on your investment is directly related to the prevailing market price of the Company's shares, which will trade at a varying discount (or premium) relative to the value of the underlying assets of the Company. As a result, losses (or gains) may be higher or lower than those of the Company's assets.
- The Company may use gearing (borrowing to invest) as part of its investment strategy. If the Company utilises its ability to gear, the profits and losses incurred by the Company can be greater than those of a Company that does not use gearing.
- If the Company seeks to minimise risks (such as exchange rate movements), the measures designed to do so may be ineffective, unavailable or negative for performance.
- All or part of the Company's management fee is taken from its capital. While this allows more income to be paid, it may also restrict capital growth or even result in capital erosion over time.
- Shares/Units can lose value rapidly, and typically involve higher risks than bonds or money market instruments. The value of your investment may fall as a result.
- The Fund may use derivatives with the aim of reducing risk or managing the portfolio more efficiently. However this introduces other risks, in particular, that a derivative counterparty may not meet its contractual obligations.
- If the Fund holds assets in currencies other than the base currency of the Fund, or you invest in a share/unit class of a different currency to the Fund (unless hedged, i.e. mitigated by taking an offsetting position in a related security), the value of your investment may be impacted by changes in exchange rates.
- Securities within the Fund could become hard to value or to sell at a desired time and price, especially in extreme market conditions when asset prices may be falling, increasing the risk of investment losses.
- Some or all of the ongoing charges may be taken from capital, which may erode capital or reduce potential for capital growth.
- The Fund could lose money if a counterparty with which the Fund trades becomes unwilling or unable to meet its obligations, or as a result of failure or delay in operational processes or the failure of a third party provider.