Global dividend growth faces two major headwinds in 2018 which could disrupt the otherwise-supportive backdrop for income, according to Martin Currie’s Global Equity Income manager Mark Whitehead.
Beyond this, however, he says he is avoiding UK banks and even some of the oil majors.
Says Whitehead: “UK banks are not a focus for us because of UK consumer weakness and corporate spending concerns sparked by Brexit, as well as levels of indebtedness. Indeed, there is a lot of risk in investing in UK income stocks because of the concentration of payouts, and we don’t have any BP or Shell, for example.”
Instead his fund has positions in regional US banks including Huntington Bank Corp, as well as Caixabank in Spain. However, he continues to avoid UK-focused banks because of pressures on consumers.
Whitehead thinks banks globally are leading that earnings growth, with the rising interest rate environment in the US in particular a source of opportunities.
“Banks are now much better capitalised than they have been for some time, and that means they are able to pay more attractive, rising dividends now” Whitehead said. “Therefore, we are seeing some of the strongest earnings and dividend growth globally coming from that sector.”
Dividend growth – risks to outlook
Dividend growth came in at 7.7% in 2017, with total payouts at an all-time high of $1.25 trillion. The expectation for 2018 is more of the same, with the growth rate forecast to match 2017’s.
Nonetheless, Whitehead, manager of the Legg Mason IF Martin Currie Global Equity Income fund, said there were risks to the outlook, in particular the threat to global trade from President Trump in the US.
Whitehead said: “It is a serious risk if the situation becomes even more strained, and for those companies with high levels of foreign sales it could have a significant impact.”
According to Legg Mason, the repercussions of further trade tariffs could be far wider than just China, with European and US-based exporters likely to be among the biggest losers of any tariffs. In particular, areas such as car manufacturers have been singled out. Barriers to trade could rock markets around the globe, Whitehead said.
The other risk he highlighted was the issue of a global economic slowdown. Whilst not a central forecast, it remains a risk that could derail markets.
“If we see growth falter, then that would obviously feed into dividend growth. However, in the current environment we do not see this as a central issue, and indeed growth globally looks solid, with earnings growth forecast at 15% currently,” he added.