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UK equity income market review (September 2017)

Brexit haunts UK investors

While most other major equity markets rose during September, investor sentiment in the UK was dampened by ongoing Brexit-related concerns. Demand for UK equity funds has continued to fall, and UK-based retail investors have been focusing on funds in the European Excluding UK sector and the Global sector.

  • The FTSE 100 Index ended September in negative territory
  • Companies in the financials sector paid the most in dividends during Q2
  • Investors’ appetite for UK equity income funds has continued to deteriorate

“UK-based retail investors continued to shun their home market”

The FTSE 100 Index declined during September, dampened by ongoing Brexit-related worries and concerns over mounting tensions between North Korea and the US. During September, the FTSE 100 index fell by 0.8%, while the FTSE 250 Index rose by 0.4%. The yield on the FTSE 100 Index rose from 3.86% to 3.92 during September, while the FTSE 250 Index’s yield climbed from 2.67% to 2.73 . In comparison, the yield on the ten-year gilt surged from 1.09% to 1.41% over the month.

Sports retailer JD Sports revealed robust interim earnings during the month. The company raised its dividend payout, but emphasised its belief that shareholders’ long-term interests are better served by implementing a policy of “restrained” dividend growth in order to maximise funding for growth opportunities. Meanwhile, supermarket retailer Morrisons announced strong first-half earnings and sales growth, and also increased its dividend.

Over the first three quarters of 2017, the best-performing FTSE industry sectors were industrial metals & mining, leisure goods, personal goods, electronic & electrical equipment, and forestry & paper. At the other end of the spectrum, the worst-performing sectors included fixed-line telecoms, oil equipment & services, electricity, media, and technology hardware and equipment.

Out of 17 FTSE industry sectors, 12 paid more in dividends during the second quarter of 2017 than in the second quarter of 2016, according to Capita Asset Services’ quarterly UK Dividend Monitor . Companies in the financial sector paid the most in dividends during the period, contributing over £10 billion. The impact of Barclay’s dividend cut was mitigated to some degree by an increase from Lloyds; elsewhere in the sector, although HSBC left its US dollar-denominated payout unchanged, sterling-based investors benefited from the impact of the weak pound. Resources companies were responsible for almost half of the annualised dividend growth; every mining company raised its payout. In particular, mining company Glencore reinstated its dividend payout for the first time since 2015, while Rio Tinto’s dividend was much higher than expected.

UK-based retail investors continued to shun their home market during August, according to the Investment Association (IA) , focusing instead on continental European and Global funds. UK funds suffered total outflows of £167 million over the month. The worst-selling IA sector was UK Equity Income, which experienced outflows of £165 million. In contrast, demand for funds in the Global Equity Income sector picked up.

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