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SLUGGISH PERFORMANCE FROM LARGEST FTSE FIRMS WEIGHS HEAVILY ON DIVIDEND GROWTH

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Justin Cooper
  • Headline dividends rise just 1.2% year on year in Q2, slowest growth in over three years
  • Total payout reaches £25.8bn in Q2
  • Top 15 payers, who account for 61% of Q2 dividends, see dividends fall 0.8%
  • Slow corporate earnings growth and strength of sterling take toll on dividend growth
  • Commodity and financial firms, most exposed to currency effects and global headwinds,         worst performers in quarter
  • Real estate, housebuilders, retailers, and industrials benefit from UK economic improvement
  • Forecast for 2014 cut by £900m to £98.5bn, but 2015 likely to see pick-up

 UK dividend growth slowed to a crawl in the second quarter, according to the latest UK Dividend Monitor from Capita Asset Services, which provides expert shareholder and corporate administration services. Dividends climbed just 1.2% year on year to £25.8bn, weighed down by falling payouts from the biggest FTSE 100 firms. This was the smallest increase in a quarterly total since 2010 (barring an unusual Q1 2013).

Excluding special dividends, growth was faster, but not by much. The total underlying payout inched forward 3.2% in the second quarter, making it the third weakest rate of growth in three and half years. Special dividends added £705m in the second quarter, less than the £1.2bn total in the same period a year ago.

Sub-inflationary headline level growth has been slowed by falling contributions from the largest constituents of the FTSE 100. Given their size and global operations, these firms are the most exposed to global headwinds and the current strength of the sterling, which have hampered earnings and dividends. This is reflected in a decline in payouts in sterling terms.

Payouts from the top five, who account for 34% of the second quarter’s total, fell 0.3%. Among the top 15, who make up more than three fifths of the UK’s dividends, eight companies saw their payouts decline. Dividends from the top 15 fell 0.8% year on year.

A weak performance from the biggest payers obscured more encouraging growth from those outside the top 15, who have been more heavily impacted by the UK economic recovery. These saw an average increase in dividends of 4.4%, although they only account for two fifths of dividends paid, and this rate of growth is still sluggish by historic standards.

The strength of sterling against the dollar continued to take its toll on the UK’s largest firms, impacting the seven of the top 15 which declare their earnings in dollars. The pound ended the second quarter at US$1.71, having risen 2.6% over the period. By the end of June 2014 it was 12.5% stronger against the dollar compared to a year ago.

Justin Cooper

Justin Cooper

Commodity firms and financials felt the brunt of global economic turbulence and currency effects. Mining firms saw their payouts fall 10.1%. Among financials, banks, insurers and financial services firms all paid lower dividends. Companies heavily exposed to the recovering UK economy performed more strongly. Consumer services firms (+18.1%), were buoyed by the travel and leisure sector and general retailers, while housebuilders propelled the household goods and home construction sector up 8.4%. Real estate services firms (which include estate agents) also did well. Riding the wave of the property boom, many were able to raise their dividends, and the sector was boosted by newcomers to the market over the last year.

The ongoing strengthening of the pound and slower earnings momentum has compelled Capita Asset Services to reduce its full year forecast for dividend income. Having cut its forecast by £1.7bn in April, the firm has now reduced it by a further £900m, from £99.4bn to £98.5bn for the year. This implies underlying dividends will climb 3.5% to £80.6bn. Special dividends will leap ahead to £17.9bn (up from £2.4bn last year), as a result of the Vodafone Q1 payout. 2014 will see the slowest growth since 2010, when BP cancelled its payout.

While 12 month yields on equities have dropped to 4.1% following stronger share prices and weakening dividend growth, they remain higher than 10-year gilt yields (2.75%), property rental yields (3.6%) and cash deposits (1.3%).

Justin Cooper, chief executive of Shareholder solutions, part of Capita Asset Services said: “Investors saw dividend payouts begin the year with a bang thanks to Vodafone’s big special, but just one quarter on, headline growth has become a whimper, as the serious headwinds facing investors reasserted themselves. Given their size and contribution to the total amount paid out, income investors are a hostage to the fortunes of the very biggest listed companies. These global companies have felt the impact of a surging sterling and slowing momentum in the global economy, and struggled to maintain – let alone raise – the amount they are returning to investors. This has dragged down the performance of the whole market.

“We should see a pick-up in 2015. It’s hard to imagine the currency continuing to detract from growth, and if the pound maintains its current level it will only have a small impact in the first half of next year. Equally, if as forecast, the global economy picks up speed, it will be felt right at the top of the FTSE 100, and this should filter its way into investors’ pockets.”

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Investment Roundtable: Live with Jim Bianco

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With Q4’s macro picture still looking grim amid the return of exponential coronavirus waves in Europe and the U.S. and Europe, we speak with veteran macroanalysis strategist Jim Bianco, CMT for a data-driven deep-dive into the global economy and financial markets on Sept. 7th at 12pm EDT.

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Key themes:

  • Learn from Jim’s unique combination of quantitative and qualitative analytics which provide an objective view on Rates, Currencies and Commodities to make smart investment decisions
  • Identify important intermarket relationships he is watching with respect to Global Equities
  • Roadmap a global outlook for 2021 in view of socio-political backdrop giving viewers key takeaways and intermarket perspectives on global investing.

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Jim’s robust technical analysis includes a broad look at trends and themes in the markets, market internals, positioning such as the Commitment of Traders (COT), sentiment, and fund flows. Don’t miss out on this exclusive session from one of the investment world’s most insightful thought leaders.

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Equity markets react to a rise in Covid-19 cases, uncertain Brexit talks and the upcoming US election

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Equity markets react to a rise in Covid-19 cases, uncertain Brexit talks and the upcoming US election 1

By Rupert Thompson, Chief Investment Officer at Kingswood

Equity markets had another choppy week, falling for most of it before recovering some of their losses on Friday and posting further gains this morning.

At their low point last week, global equities were down some 7% from their high in early September. US equities were down close to 10%, hurt by the large weighting to the tech giants which at least initially led the market decline.

The market correction is nothing out of the ordinary with 5-10% declines surprisingly common. Indeed, a set-back was arguably overdue given the size and speed of the market rebound from the low in March.  As to the cause for the latest weakness, it is all too obvious – namely the second wave of infections being seen across the UK and much of Europe and the local lockdowns being imposed as a result.

These will inevitably take their toll on the economic recovery which was always set to slow significantly following an initial strong bounce. Indeed, business confidence fell back in September both here and in Europe with the declines led by the consumer-facing service sector. A further drop looks inevitable in October – fuelled no doubt in the UK by the prospect that the latest restrictions could be in place for as long as six months.

The job support package announced by Rishi Sunak did little to boost confidence. Its aim is to limit the surge in unemployment triggered by the end of the furlough scheme in October. However, the scheme is much less generous than the one it replaces as the government doesn’t want to continue subsidising jobs which are no longer viable longer term.  A rise in the unemployment rate to 8% or so later this year still looks quite likely.

Aside from Covid, for the UK at least, there is of course another major source of uncertainty – namely Brexit. Another round of trade talks start this week and we are rapidly reaching crunch time with a deal needing to be largely finalised by the end of October.

Whether we end up with one or not is still far from clear. That said, the prospects for a deal maybe look rather better than they did a couple of weeks ago when the Government was busy tearing up parts of the Withdrawal Agreement. With significant Covid restrictions quite probably still in place in the new year and the Government already under attack for incompetence, it may not wish to take the flack for inflicting yet more chaos onto the economy.

Markets remain unimpressed. UK equities underperformed their global counterparts by a further 2.7% last week, bringing the cumulative underperformance to an impressive 24% so far this year. The UK weighting in the global equity index has now shrunk to all of 4.0%.

It is not only the UK which faces a few weeks of uncertainty. The US elections are on 3 November. We also have the first of three Presidential debates this Tuesday. Joe Biden’s lead looks far from unassailable, a close result could be contentious and control of Congress is also up for grabs.

All said and done, equity markets look set for a choppy few weeks. Further out, however, we remain more positive – not least because the focus should hopefully switch from the roll-out of new lockdowns to the roll-out of a vaccine.

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What Investors are Looking for in the Next Fintech

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What Investors are Looking for in the Next Fintech 2

By Shaun Puckrin, Chief Product Officer, Global Processing Services

Are investors getting pickier when it comes to fintech? It’s hard to say for sure, but there are recent developments that point towards a shift in investor interests.

Firstly, research from Innovate Finance shows that investment in UK fintech dropped by 39% in the first half of 2020, compared to the same period in 2019. In H1 2020, $1.8bn of venture capital was invested in 167 startups compared to H1 2019, when $3bn was invested in 263 startups.

However, it’s worth mentioning that the $1.8bn UK fintech investment earlier this year was still a 22% increase over the second half of 2019, when funding totalled $1.5bn. Therefore, all signs suggest that investors will make significant increases in capital investments during the rest of the year.

Secondly, it appears that the current investor appetite is for more mature, later-stage fintechs: more than half of the $1.8bn went to just five companies: Revolut, Checkout.com, Starling Bank, Onfido and Thought Machine. Perhaps it is the ongoing economic uncertainty surrounding the COVID-19 crisis that is prompting inventors towards perceived “safer bets”, but what we do know for a fact is that early-stage fintechs raised just 8% of the total investments.

Is there a silver lining? The coronavirus crisis has rapidly accelerated the digitisation of financial services, with lockdown restrictions encouraging those previously resistant to engage with digital financial services. The stage is set for fintechs to thrive and deliver offerings that meet shifting consumer demands. To be in with a shot of wooing investors, fintechs will need to demonstrate certain qualities that set them apart from other companies.

So, what are the four things investors are looking for in the next big fintech?

  1. A strong, differentiated proposition

The fintech marketplace is crowded and filled with mature innovators setting a high standard for everyone else. Against this backdrop, “challenging the incumbents” is, unfortunately, no longer a USP.

To really catch the attention of investors, you must be addressing a clear, pressing market need that no one else is tackling. Not just that, your proposition must be easily articulated and backed to the hilt with market research that proves the opportunity is worth pursuing.

Ultimately, investors are going to ask the question: why you? What are you doing that’s unique? What do you have that means you – and only you – can do this? They will also want to know how defendable that proposition is once you’ve built it.  What is your moat? Getting this right means a foot in the door with investors.

  1. A path to profitability or exit

This is an extremely pertinent point, especially given recent news surrounding the financial results for many of the big challenger banks, and how they show the route to profitability for challengers isn’t necessarily straightforward or easy.

In the current environment, an attractive fintech must be able to demonstrate a concrete, long-term plan for the financial viability of the business. There are different paths for investors to make their returns, be it a trade sale or IPO, but the fundamentals of securing a successful outcome are usually the same. By being able to demonstrate how you can plot a course to attract and serve your customers for less than you can monetise them will be at the route of any subsequent valuation, no matter how its outcome is achieved.

Whatever the goal, you need a plan to support your ambitions. You need to demonstrate an understanding that building a scalable and sustainable fintech is likely to require significant capital – you must invest in the right people, partners and technology to make money. Developing competitive services, attracting customers and, crucially, monetising your offerings, requires hard work and the ability to adapt to your customer’s needs.

  1. Strong leadership and core team

Ultimately, securing investment is about building relationships and what often tips the scales is having the right people in the room. This is why a great team is crucial.

A great team means many things: Strong leadership with the vision to build something revolutionary. The skills and expertise to turn that vision into reality. The experience to traverse the pitfalls and opportunities you’ll face. And finally, the ambition and determination to make the business successful no matter what.

Building the right team with the right qualities is often what convinces investors that they’re putting their money in the right place.

  1. The right partnerships

Partnering with the right organisations can give you strategic access to the solutions that will help build and scale your offering. Their expertise and experience are often invaluable; many partners have been in the game for years and may have already solved problems you might be encountering for the first time.

From an investor’s perspective, seeing that you’re working with credible partners and proven tech helps build confidence. It shows that you’re a less risky investment, and that you respect their investment and are going to be using their money to build real value.

Fintech investment is not dead

After this recent blip, we expect the amount of investment into fintech to continue to be significant, at least in relation to other industries. But there’s no avoiding the fact that investors will be looking to stress test potential investments much more than before.

By creating a differentiated proposition, planning a clear route to profitability, building a strong team, and finding the right partners, fintechs will be in with a shot of securing the funding they need to make their grand vision a reality.

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