EuropeOct 10 2016

Dividends emerging from ‘erratic’ period

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Dividends emerging from ‘erratic’ period

It has been a rather mixed year for investors in Europe, with European Central Bank policy weighing heavily on investors’ minds and a series of geopolitical headwinds perhaps distracting from some of the opportunities to be found in the equity market.

Stephen Macklow-Smith, head of European equity strategy at JPMorgan Asset Management, paints a gloomy picture for European equities.

He says: “European equity markets have suffered seven consecutive months of outflows since the end of January 2016, and the year-to-date performance of most European equity indices has been negative, despite a 13th consecutive quarter of positive eurozone GDP growth in the second quarter.”

Columbia Threadneedle Investments suggests the past five years have been an “erratic time” for European stockmarkets, revealing that the FTSE World Europe ex UK index fell 12.5 per cent in 2011.

But in the past 12 months to September 27, the MSCI Europe ex UK index gained 18.4 per cent, although it lagged some of the other major regional indices over the period, data from FE Analytics shows.

This type of environment seems to make the case for seeking out funds run by managers who are able to ride out some of the lacklustre stockmarket performance and deliver returns from high-quality or growing companies.

David Dudding, portfolio manager on the Threadneedle European Select fund, suggests: “High-quality stocks can generate sustainable capital growth for investors at a time when weak economic growth and other factors are putting pressure on equity performance.

“While many stocks are highly dependent on the prevailing conditions in the economy and stockmarket to drive their returns, the best high-quality growth stocks should be able to carry on delivering high returns on capital, and earnings growth, almost regardless.”

As the US engine of global dividends is slowing down, so Europe is showing encouraging growth.Alex Crooke, Henderson Global Investors

Jason Hollands, managing director at Tilney Bestinvest, points to the fortunes of fund managers in the region. He reveals over the five years to the end of August 2016, 65.8 per cent of funds in the IA Europe ex UK sector beat the FTSE World Europe ex UK index, showing active fund management is alive and well. 

To put this into context, Mr Hollands found over the same period just five funds in the IA North America sector – little more than 6 per cent of the universe – beat the S&P 500 index after costs.

The dividend-paying culture among European corporates has historically been patchy, but there are signs of great improvement in this area. 

The latest Henderson Global Dividend Index shows European dividends totalled $140.2bn (£109.3bn) in the second quarter of 2016, accounting for two-fifths of the second-quarter total and making it the largest contributor to the global total. 

Particularly impressive was the underlying growth of 4.1 per cent, in spite of large dividend cuts from Deutsche Bank and Volkswagen.

The Netherlands posted the fastest growth rate in Europe, with payouts of $7.6bn, up 28.3 per cent in underlying terms, while France was the biggest payer. The index reveals almost nine in 10 French companies increased their payouts or held them steady.

Alex Crooke, head of global equity income at Henderson Global Investors, observes: “As the US engine of global dividends is slowing down, so Europe is showing encouraging growth.”

Tim Crockford, portfolio manager on the Hermes Europe ex UK Equity fund, acknowledges it is a challenging time for investors and asset allocators but sees Europe as offering the best relative value among developed markets.

He adds: “In a market where central bank policy is increasingly distorting equity valuations, structural change continues to unearth new opportunities that are being overlooked by a market that is more focused on next week’s rate move, rather than next-generation technology.

“We would encourage investors to take a break from analysing the parlance of central bankers, and dig down into the sectors and companies where change is rife, rather than buying or selling the market.”

Ellie Duncan is deputy features editor at Investment Adviser