In a world where about $1.3 trillion of government bonds have negative yields, U.K. stocks stand out.
After the FTSE 100 Index trailed its European peers for the past three years, the trend started to changed last month. JPMorgan Asset Management says dividend payout rates that are almost double the yield of 10-year gilts will keep demand flowing for U.K. stocks.
“In a yield-hungry world where some bonds are yielding negative, the FTSE 100 -- an international index that’s yielding almost 4 percent -- looks pretty attractive,” said William Meadon, a London-based fund manager at JPMorgan Asset Management. His firm oversees about $1.7 trillion worldwide. “The prime speculation in the U.K. is when interest rates are going to have to go up. I don’t think that’s imminent.”
Economists don’t expect interest rates to go anywhere until next year. The Conservative Party’s win on Friday signaled government spending cuts, potentially dimming the economic outlook. That prompted banks including JPMorgan Chase & Co. and Rabobank International to reduce their forecasts for higher borrowing costs, which have been at a record low for six years. Bank of England Governor Mark Carney presents new economic forecasts on Wednesday.
A flurry of buybacks and dividends is adding to the appeal of U.K. stocks, Meadon said. Broadcaster ITV Plc and clothing retailer Next Plc announced special dividends this year, while Rio Tinto Group and Experian Plc said they’ll buy back shares.
The 3.8 percent dividend yield of FTSE 100 companies compares with a rate of about 2 percent on Britain’s 10-year bonds and 3.4 percent for the payout rate of Euro Stoxx 50 members.
A rebound in oil may also shore up U.K. stocks, thanks to the FTSE 100’s large weighting of energy companies like Royal Dutch Shell Plc and BP Plc. Takeover speculation is helping after Shell said it planned to purchase BG Group Plc.
The FTSE 100 has rallied 2.1 percent since the end of March, compared with a 3.7 percent drop in the Euro Stoxx 50. That pushed the 60-day correlation coefficient between the two indexes to its level since 2004, meaning they don’t move in lockstep as much as they used to.
Still, even with a 5.3 percent rally this year, the U.K. index trails the Euro Stoxx 50 by 8 percentage points. To SVM Asset Management’s Colin McLean, that was partly driven by investors holding off on taking new positions because of election uncertainty.
“The U.K.’s not in a bad position,” said McLean, founder and chief executive officer of SVM in Edinburgh. His firm oversees more than $800 million. “We’re not printing our currency the way Europe is, so the market should catch up.”