Capturing Opportunities in the UK's "Steady as She Goes" EconomyFeb 2, 2018

 

As the UK economy continues to defy the most bearish expectations, Colin Morton, vice president, portfolio manager, UK equity team, wonders whether the UK’s “steady-as-she-goes” economy warrants some optimism, and shares why he is positive about the opportunities in his rising dividends approach.

We’re optimistic about the opportunities we see within our UK rising dividends strategy.

The recent company reporting season was fairly robust with many businesses performing well, in spite of the volatile political backdrop and concerns around trade protectionism.

The macro-economic environment remains supportive and the United Kingdom has continued to defy the most bearish post-Brexit expectations of economic downturns and significant unemployment.

We've actually seen the UK economy continue to grow at a reasonable rate. It's not an exciting rate, and continues to lag global growth projection, but it is at least projected to grow 1.5% in 2018 and 20191.

In fact, our analysis shows that when UK growth is compared against other European economies, the UK economy has grown in line with the German economy in real gross domestic product (GDP) terms.2 In the 10-year period since the 2008 Global Financial Crisis, Germany, the United Kingdom and France have recovered well as a whole, despite a slight slowdown in economic growth.

In general, we’ve seen dividends in line or a touch better than expectations across the market. While we aren’t looking at stocks on a sector-by-sector basis, we recognise that consumer discretionary stocks with UK exposure remains a tough area.

A "Rising Dividends" Approach

Our rising dividends selection criteria means we only look at firms that have grown their dividends in at least eight of the past 10 years. They must also have not cut their dividend in this time.

We also look for companies that continue to reinvest in their businesses. We feel this should mean we’re buying into future growth. Although this approach might keep a firm’s yields low for now, they are less likely to cut them in the future and may in fact grow them.

Learn more: Franklin UK Rising Dividends Fund.

Brighter Prospects

There are encouraging signs of improving growth in most parts of the world.

The United States is seeing its highest growth for a number of years. Meanwhile, confidence seems to be returning to Europe amid signs of economic improvement there. The International Monetary Fund recently upgraded its global growth forecast by 0.2% to 3.9% for 2018 and 2019.3

In global terms, we’re not yet at pre-global financial crisis growth levels, but there are encouraging signs that growth will be stronger in 2018 than we’ve had for the last number of years. Our ambition is to play into that with the way we position our portfolio within our UK rising dividends strategy.

We remain focused on identifying good opportunities with the potential to side-step macro hurdles as they arise.

Our interest remains in stocks presenting attractive valuations, good cash flows and upsides, regardless of what macro situations might throw at them.

Important Information

Data from third-party sources may have been used in the preparation of this material and Franklin Templeton Investments (“FTI”) has not independently verified, validated or audited such data. FTI accepts no liability whatsoever for any loss arising from use of this information, and reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user. Products, services and information may not be available in all jurisdictions and are offered by FTI affiliates and/or their distributors as local laws and regulations permit. Please consult your own professional adviser for further information on availability of products and services in your jurisdiction.

The comments, opinions and analyses expressed herein are for informational purposes only and should not be considered individual investment advice or recommendations to invest in any security or to adopt any investment strategy. Because market and economic conditions are subject to rapid change, comments, opinions and analyses are rendered as of the date of the posting and may change without notice. The material is not intended as a complete analysis of every material fact regarding any country, region, market, industry, investment or strategy.

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_____________________________

1. International Monetary Fund, World Economic Outlook Update, January 2018.

2. Office for National Statistics, Destatis, February 2018.

3. Ibid.

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