Bill Jamieson comment: How markets have kept their head amid turmoil

The UK market has shown ice-cool resilience in the face of torrid political news, says Jamieson (pictured). Picture: Scott Louden.
The UK market has shown ice-cool resilience in the face of torrid political news, says Jamieson (pictured). Picture: Scott Louden.
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A sigh of relief? Or a shrug of indifference?

Whichever it is, the UK stock market has continued to extend its rally since January into its fourth month. The FTSE 100 Index closed on Friday at 7,437.06, up by just over 700 points or 10 per cent since the start of the year. And the FTSE250, comprising smaller and mid-sized companies more exposed to the ups and downs of the UK economy, grew by 1,900 points or almost 11 per cent over the same period.

This is a signal advance, particularly in the light of all those gloomy prognostications back at the end of 2018 that a combination of the global slowdown and Brexit would give further cause for investor flight. Quite the opposite has been the case – even though Brexit uncertainty and can-kicking has now been extended for another six months. And that further stretches the prospect of economic drag with continued deferment of business investment and yet more worst-case preparations. Yet investors seem unperturbed and have sheepishly turned to those panic stocks of baked beans in the pantry for a “no-deal” crash siege.

Tatton, the investment services company with £5 billion in assets, reckons that level-headedness has prevailed and that this should help the UK economy “to participate fully in the anticipated recovery of global trade volumes over the coming months following the 2018 slump”. But this comes with a warning of more political instability: “A confirmatory second referendum or a general election appears inevitable in order to break the deadlock in a parliament which of late is far less reflective of party politics and far more representative of a highly divided UK public.”

Its senior investment team has become slightly more optimistic but is still full of regional uncertainty. End-of-cycle doom-mongers have become less vocal as the typical late cycle conditions have reversed over the past 12 months. “The global economic slowdown of 2018 is still in full swing but is now clearly just that – a slowdown in growth and not a recessionary growth contraction. In the recent past, such conditions have persuaded investors to take a longer-term perspective on corporate earnings growth and look beyond one or two quarters of low or even negative growth, so as not to miss the upswing.

“At a regional level, the outlook is more complicated. The US has not yet experienced the slowdown which the rest of the world has gone through. This is because US demand was artificially elevated by Donald Trump’s late-cycle fiscal stimulus of corporate tax cuts and government deficit spending, now waning. Europe… has suffered from investor withdrawal due to its high dependency on global trade and - of late – the Brexit headwinds.” As both of these factors are now abating, Europe’s stock markets should, say the Tatton gurus, have a considerably greater upside potential given their lower starting point.

UK heads for £100bn bonanza

Of all the factors that help determine the level of share values, dividend income is among the most critical. And it is here we find why the UK market has shown such ice-cool resilience in the face of torrid political news. UK dividends jumped 15.7 per cent in the first three months of 2019 - easily a first-quarter record, according to the latest UK Dividend Monitor from Link Asset Services out on Monday 15 April.

The dramatic increase was largely due to very large one-off special dividends. Underlying dividends (excluding specials) by contrast grew slightly more slowly than Link expected, rising 5.5 per cent to £17.6bn.

Based on the slightly weaker-than-expected start to 2019, and slower growth in company earnings, Link expects underlying growth of 3.9 per cent this year, down from 5.3 per cent in January. That will take underlying dividends (excluding specials) to £99.7bn, a comfortable record. The big boost from specials takes headline dividends to a record £106.1bn, exceeding £100bn for the first time. Not all, it seems, is cast down by Brexit.