Market commentary

15 May 2020

Outlook for economic growth and markets by Chris Darbyshire, Chief Investment Officer, Walker Crips Investment Management Limited

Although portfolio values have rebounded since stock prices bottomed in March, it’s too early to declare the all-clear. Like most developed countries, the peak of the medical crisis in the UK appears to have passed, but the number of active cases is declining only very slowly. This means that any re-opening of the economy can only be partial, and that expectations for the return of normal economic growth have had to be delayed by several months. Even those countries that have successfully defeated the virus are finding it difficult to convince people to return to normal economic life. Not surprisingly, people who have endured months of hardship shielding themselves and their families from the virus are unwilling to risk catching it now. Moreover, many consumers have suffered, and continue to suffer, financially, and will be forced to rebuild their savings before their spending can return to normal. 

It is likely that capital values will continue to be volatile. The prospects for dividend payments, however, are worse. A large number of companies have cut their dividend payments: some out of financial necessity, some as a precaution in uncertain economic conditions, and some because it has become politically difficult to pay dividends at a time when so many are suffering hardship. 

In prioritising income-generation, primarily through investing in companies that pay dividends, the objective is to find stable, dividend-paying companies that can protect the capital value of the portfolio while giving the income to preserve lifestyle. With so many companies cutting their dividends, and so much uncertainty economically, however, neither capital values nor dividend payments can be relied on to be as stable now as they were in the recent past. It’s important that, in targeting relatively high levels of dividend income, the portfolio is not becoming exposed to higher levels of risk. Moreover, many of the companies that are proving to be most resilient to the pandemic are not big payers of dividends. 

It is also possible to generate income using a combination of dividend payments and capital growth. Capital growth can be realised by selling shares. Ideally, this works best when the shares have risen in value. Where companies pay no dividends, investors must derive all their income from selling shares in the company but, as long as those shares have gone up in value sufficiently, investors are no worse off compared with a company that pays all its returns through dividends. There may even be gains associated with a lower tax rate on capital gains rather than dividends (or other forms of income, such as payments from bonds), though these gains must be offset against the transaction costs and inconvenience associated with selling shares. 

Using a combination of capital growth and dividend income to meet spending needs, is known as a “total return” approach.

Important information

The value of any investment and the income arising from it is not guaranteed and can fall as well as rise, so that you may not get back the amount you originally invested. 

The publication is intended to be Walker Crips Investment Management’s own commentary on markets. It is not investment research and should not be construed as an offer or solicitation to buy, sell or trade in any of the investments, sectors or asset classes mentioned. Past performance is not a reliable indicator of future results. Nothing in this document constitutes advice to undertake a transaction, if you require professional advice you should contact your financial adviser or your usual contact at Walker Crips. 

Walker Crips Investment Management Limited is authorised and regulated by the Financial Conduct Authority and is a member of the London Stock Exchange. Registered office: Old Change House, 128 Queen Victoria Street, London, EC4V 4BJ. Registered in England number 4774117.