Income investing could face the dichotomy of being more popular but more difficult in the wake of the UK’s decision to leave the EU, according to Axa Investment Managers’ Jamie Forbes-Wilson.
The manager of the £974m and the £889m Axa Lifetime Distribution and Distribution funds said the economic turmoil following the Leave vote would add severe complicating factors to income investing.
Many of these factors remain out of the hands of investors, who have already faced several years of record-low bond yields and, increasingly, yield compression among equities.
Axa IM UK economist David Page has predicted UK inflation will rise to 2.5 per cent by the end of 2018 – above the Bank of England’s (BoE) 2 per cent target – due to sterling weakness.
This would increase the desire for index-linked income, while making it difficult to find, Mr Forbes-Wilson said.
A significant issue for income investors is that a rise in inflation is unlikely to be matched by interest rate rises. Instead, Mr Page expects two rate cuts this year and additional quantitative easing in 2017, as the BoE bids to combat a slowing economy.
“The problem investors have got – and we didn’t think it could get more difficult but it’s moving in that direction – is looking for income,” Mr Forbes-Wilson said.
“Interest rates have been forecast to be cut further so the income from cash and [bonds] is shrinking. There is a higher tolerance of inflation, but it’s fine for the [BoE] to tolerate it. Investors will want to preserve their capital.”
With his funds aimed at cautious, long-term investors, significant shifts to account for the concerns will be limited. The manager said he would add stocks at the margins of the 55/45 equity/bond portfolio.
| KEY NUMBERS |
1.76%: Spread between Bloomberg’s UK corporate bond and government bond indices 40%: Amount of FTSE 100 dividends paid in non-sterling currencies |
Mr Forbes-Wilson said in low-growth environments, dividends were “the building block of investment” and, as such, would continue to be required.
He added the search for income from equities was now set to be stepped up once again, with investors honing in on quality stocks.
UK equity investors took fright in the aftermath of the EU referendum decision, rotating into safe havens such as consumer staples and utilities. The greater focus on quality stocks has put further pressure on valuations, and caused yield compression to accelerate.
In the first three days after the vote, for instance, the FTSE 100 index was down 3 per cent but the FTSE Utilities benchmark rose 0.1 per cent.
Mr Forbes-Wilson said: “The difficulty is that we do not have any [political or economic] clarity, which means investors do not know where they stand so [high] valuations are tolerable. Consumer staples, where [valuation] is questioned a lot – the quality those companies offer is rare. And the scarcity value at a time of concern goes up.”
However, Mr Forbes-Wilson remained positive on some aspects of the UK equity market, noting that non-sterling denominated dividend payers would benefit; large-cap oil and gas stocks, such as Shell, have already bounced.
The Lifetime Distribution fund returned 1.6 per cent in the three days since June 24, compared with the average of 0.2 per cent from the IA Mixed Investment 20-60% Shares sector, according to FE Analytics.
