INVESTMENTS economist famous for his cyclically adjusted price / earnings ( CAPE ) measure , has further enhanced his traditional metric to take account of low interest rates , creating the excessive cape yield ( ECY ). Shiller ’ s ECY measures a company ’ s earnings as a percentage of its average share price , minus the prevailing interest rate . The ECY for the UK is at an all-time high at 10 %, and significantly higher than other markets such as the US , Europe and Japan . As Shiller notes , “ the only other time ECYs were this high using our global data was in the early 1980s 1 , with equities subsequently seeing strong returns .” For investors still concerned about economic uncertainty , the relative opportunity in the UK becomes even more attractive . In contrast to US equities , which are trading ahead of their closing 2019 level , the FTSE All-Share has yet to recover its previous high .
Dividends poised to strengthen valuation arguments UK dividends are expected to recover strongly in 2021 , likely growing by around 5-7 %. With the FTSE 100 yielding around 3 % at the beginning of the year , income seekers may find equity income attractive , particularly in the context of historically low interest rates in bond markets elsewhere . While the headline numbers provide a compelling case for UK dividends , there is also a lot going on underneath the surface . The Prudential Regulation Authority recently announced that banks would be able to resume dividend payouts , for example . A growing number of companies are now reinstating deferred dividends , with trading having proven more robust . We also see some potential for ‘ catch-up dividends ’, as companies return previously deferred payments to shareholders or return cash , with trading having been better than expected .
Constrained consumer demand As we have seen from several management teams , there is growing evidence that consumers are getting ready to spend again . While COVID-19 will have negatively impacted the finances of many people , the overall picture is encouraging . The UK household savings ratio reached a record peak of 29.1 % in the second quarter of 2020 , with UK consumers paying off around £ 13bn in credit card and other unsecured debt in the ten months to the end of October , effectively cancelling out the increase from 2019 .
We are now seeing consistently strong demand across the companies we invest in , with many posting trading updates ahead of expectations . Consumption rose by 18.3 % in the third quarter , and we expect this trend to continue throughout 2021 .
Value , cyclicals , but don ’ t forget growth Any economic recovery will likely help the more value and cyclically exposed parts of the stock market initially , with the UK tending to have a higher preponderance of these companies . However , investors should not overlook their growth exposure in a world where many of the secular growth drivers prevalent in the UK and wider global economy are likely to accelerate , and where interest rates are likely to remain supressed . Even amidst an economic rebound , UK unemployment is still expected to peak at around 7.5 % next year , with the recovery in investment tracking lower than in previous recoveries . Well-run growth companies often have the opportunity to invest at much higher rates of return than their own cost of capital and the returns offered by structurally challenged , value names , for example . In many cases , we believe the pandemic will have strengthened the growth opportunity those companies face and their ability to take advantage of weaker competitors . DFS , for example , expects its market share to increase by around six percentage points as other furniture stores shut down . The current focus on pandemic recovery stories may even present buying opportunities amongst UK growth stocks . Aveva , for example , has experienced close to a 33 % pullback since the start of 2020 , providing an attractive long-term entry point .
2021 – an optimistic year for UK equities ? This is also an unusually positive time to be making the case for UK equities . The economy is ready to pick up strongly in 2021 , and our forecasts are reinforced by positive trading updates we have seen from companies across our portfolios . The UK market remains attractive on valuations grounds , particularly when set in an international context . As UK equity managers , we continue to believe that investors are well-served by UK-listed companies that are compounding their earnings and dividends , and which offer world-leading corporate governance , dependant contract and title law , and reliable access to company management teams . P
To find out more , please email us : LONClientServices @ axa-im . com .
[ 1 ] This quotation taken from a recent Project Syndicate Op-ed , where you can also find a fuller discussion of the Excessive Cape Yield . December 2020 .
Not for Retail distribution : This document is intended exclusively for Professional , Institutional , Qualified or Wholesale Clients / Investors only , as defined by applicable local laws and regulation . Circulation must be restricted accordingly .
This document is for informational purposes only and does not constitute investment research or financial analysis relating to transactions in financial instruments as per MIF Directive ( 2014 / 65 / EU ), nor does it constitute on the part of AXA Investment Managers or its affiliated companies an offer to buy or sell any investments , products or services , and should not be considered as solicitation or investment , legal or tax advice , a recommendation for an investment strategy or a personalized recommendation to buy or sell securities . It has been established on the basis of data , projections , forecasts , anticipations and hypothesis which are subjective . Its analysis and conclusions are the expression of an opinion , based on available data at a specific date . All information in this document is established on data made public by official providers of economic and market statistics . AXA Investment Managers disclaims any and all liability relating to a decision based on or for reliance on this document . All exhibits included in this document , unless stated otherwise , are as of the publication date of this document . Furthermore , due to the subjective nature of these opinions and analysis , these data , projections , forecasts , anticipations , hypothesis , etc . are not necessary used or followed by AXA IM ’ s portfolio management teams or its affiliates , who may act based on their own opinions . Any reproduction of this information , in whole or in part is , unless otherwise authorised by AXA IM , prohibited .
Issued in the UK by AXA Investment Managers UK Limited , which is authorised and regulated by the Financial Conduct Authority in the UK . Registered in England and Wales , No : 01431068 . Registered Office : 22 Bishopsgate , London , EC2N 4BQ .
# 01 | SPRING 2021 | 43