During February, investment sentiment was buoyed by significant progress in the UK’s vaccination programme, followed by confirmation that lockdown measures are set to be eased from March onwards.
- UK banks reinstated their dividends
- UK equity yields showed a marked decline in February
- The pound rose to its highest level against the dollar since April 2018
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During February, investment sentiment was buoyed by significant progress in the UK’s vaccination programme, followed by confirmation that lockdown measures are set to be eased from March onwards. Over the month, the FTSE 100 Index rose by 1.2%, while the FTSE 250 Index climbed by 3.4%. The pound strengthened against the US dollar, rising as high as US$1.42 to reach its highest rate since April 2018; however, sterling’s appreciation dampened sentiment towards companies in the FTSE 100 Index, which tend to generate a significant proportion of profits overseas.
“UK equity income funds remained firmly out of favour”
The yield on the FTSE 100 Index dropped from 3.69% to 3.37% during February, while the FTSE 250 Index’s yield declined from 2.30% to 1.99%. In comparison, the yield on the benchmark UK gilt rose from 0.33% to 0.84% over the month. According to the Investment Association (IA), UK equity income funds remained firmly out of favour, with net retail outflows of almost £400 million during January. The sector has not experienced positive inflows since May 2020, and it remained one of the worst-selling IA sectors over the month.
Despite some relatively weak earnings releases, the UK banking sector announced during February that it would be resuming dividend payments. The Prudential Regulation Authority (PRA) had vetoed dividend payouts from banks in March 2020, but subsequently removed the ban in December, although it urged institutions to ensure that “any distributions should be prudent”. During January, Link Asset Services commented: “(The banks) will only partially restore their dividends, but it matters more how quickly they do so, rather than exactly how much they pay”.
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