January 2018
UK equity indices fell over January as a whole, dampened by a rally in the value of the pound. Sterling’s weakness since Brexit has significantly enhanced UK dividend payouts; looking ahead, however, a stronger pound is likely to have a dampening effect on dividend payouts.
- UK equity indices general ended January in negative territory
- UK companies issued 81 profit warnings in Q4 2017
- The equity income sector remained out of favour in November
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UK equity indices fell over January as a whole, dampened by a rally in the value of the pound. Although the FTSE 100 Index hit a new all-time high during the month, the blue-chip index posted a 2% decline over January as a whole, while the FTSE 250 Index fell by 2.3%. Sterling’s weakness since Brexit has significantly enhanced UK dividends; looking ahead, however, a stronger pound is likely to have a dampening effect on dividend payouts.
“A stronger pound is likely to have a dampening effect on payouts”
The FTSE 100 Index’s yield rose from 3.81% to 3.90% during January, whereas the yield on the FTSE 250 Index increased from 2.64% to 2.70%. In comparison, the benchmark gilt yield surged from 1.23% to 1.49% over the month.
The best-performing FTSE industry sectors during January were automobiles & parts, industrial metals & mining, industrial engineering, and oil equipment & services. At the other end of the performance spectrum, the worst-performing sectors included utilities, technology and beverages.
UK profit warnings increased in number and impact during the second half of 2017, according to a survey by EY. UK companies issued 81 profit warnings during the final quarter of 2017, reaching their highest quarterly level for two years. The companies issuing the most profit warnings tended to be found in business-to-business and consumer-facing sectors; warning signs include cost and competitive pressures, uncertainty over contracts, and difficulties associated with staying in the digital race.
During 2017, one-quarter of all FTSE General Retailers issued a profit warning, and the number of warnings in the sector in the first three weeks of 2018 outstripped the entire first quarter of 2017. During January, profit warnings were issued by retailers including Mothercare, Debenhams and Carpetright. Meanwhile, 22% of companies in the FTSE Support Services sector issued profit warnings in 2017. Within the support services sector, following the collapse of outsourcing company Carillion, Capita issued a profit warning in January alongside extensive restructuring measures. These included the suspension of Capita’s dividend payout until the company is generating “sustainable free cash flow”, and plans for a rights issue during 2018.
Demand for UK equity funds remained weak during November, according to the Investment Association, and UK equity funds experienced net retail outflows of £188 million over the month. UK Equity Income suffered the lion’s share of the outflows, closely followed by UK All Companies.
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