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Could UK income rebound in 2021?

30 November 2020

Alan Dobbie, co-fund manager of the Rathbone Income fund, says he and fellow manager Carl Stick are “cautiously optimistic” about prospects for UK investing and the fund in 2021.

The duo also believe they will be able to increase the yield on the fund from its current 4% over the next year. “We have a history of improving the dividend year-on-year since 2000, when Carl began running the fund*, with 2009 and 2020 being the only glitches.

“We went into 2020 optimistic after the election at the end of 2019 but then Covid upended our plans. Like most UK funds and income funds in particular, especially as dividends were cut, we took a hit. Now we believe we are in a better place than we have been for most of this year.”

Rathbone Income fund yield 2000-2020

The fund managers forecast the yield two years ahead. “Although we have struck our forecast fairly conservatively, for how we are positioned, invested in companies that were prudent in the way they cut their dividends, and now are better versed in the effect of the pandemic on their business, we think a lot of the pain has already been seen in dividend cuts and there is potential for upside surprise.”

Banks are particularly well positioned as they have been prevented from issuing dividends and “so there is huge potential for capital return”, he says. The fund holds Nat West and Lloyds.

Alongside current cheap valuations in the UK, “a necessary but not sufficient condition for future outperformance”, the firmer foundations for dividend growth mean the managers are “optimistic on the income front at the moment”.

Dobbie continues: “With valuations where they are and a number of catalysts coming up, there is the potential for the UK to climb the wall of worry. The good news around the vaccines is one catalyst – what we need is the good data to be turned into good execution, with the carrying out of vaccinations.”

The major spanner in the works could be Brexit. “We are all hoping we get positive news on that in the next few weeks. This would lift another cloud that has been hanging over the UK market and lead to the outperformance of certain stocks – banks and insurance companies for instance would benefit.  But a no deal Brexit would be negative for UK domestic names.”

He sees a rosier macro outlook for the UK in the Chancellor’s Spending Review speech, where Rishi Sunak said that while GDP for the UK would be down 11% in 2020, the worst fall since the 1700s, 2021 GDP is forecast to be up 6% and by another 7% in 2022. “This will only bring us back to where we were before Covid but that is a stronger economic backdrop for cyclicals and value stocks to continue to outperform.”

However, given the potential for upside and downside risks, Dobbie says the fund managers’ stance at present is “to maintain a relatively balanced portfolio”.

* Dobbie joined the fund in October 2018.

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