|
Find out more about the Elston Smart-Beta UK Dividend Index (ticker: ELSUKI)
For latest UK Equity Income index factsheet click here UK Equity Income: monthly index commentary for February 2025
by Rob Davies, UK Equity Income Index Specialist at Elston Consulting
After a strong start to the year in January UK equities only just managed to deliver a positive return in February. Only two sectors, Financials and Health Care, recorded healthy gains in mid-single digits while the rest either had small gains or losses. Only one sector, Information Technology, was down in mid-single digits. There was little economic news during the month and political developments, especially from the United States, dominated the news flow. Concerns about the effects of tariffs was paramount. Sterling made gains against both the US Dollar and the euro in February even though bank rate was reduced by twenty-five basis points to 4.5% at the beginning of the month. A sluggish economy, a benign inflation outlook and slightly weaker oil prices were the background for this move. Most large UK companies have now declared their results for 2024. And it is these companies that provide the bulk of the dividend income into the UK equity market. As 2024 recedes into history the index starts to include forecasts that apply to the next forecast year which is 2026. As a consequence of this rollover the consensus forecast for total dividends from UK listed companies increased by about 1% to nearly £98 billion. The main increases came from the banks and were enough to offset reductions in forecasts from the oil and mining companies. 
Differentiating between trusts that hold real assets and listed securities allows more nuanced approach.
Trump’s chaotic tariff policy is destabilising markets and raising concerns around impact on US economic growth and inflation.
Trump's volatile tariff policy is creating uncertainty in global markets. This could hinder not help the US economic outlook.
Domestic politics is becoming more polarised.
International politics is moving from a unipolar to a multipolar world. The transatlantic security alliance is under threat. The weaponisation of tariffs is leading to deglobalisation. How to make sense of this increasingly fragile world? We explore some of the key themes of this new world dis-order.  Our last in person CPD events before Tax Year End (for UK advisers only) - some places still available!
Thu 6 Mar: Birmingham - Tax Advantage of Direct Gilts Investing Tue 11 Mar: Edinburgh - Investment Solutions in new tax regime: onshore bonds, unitised funds, GIA portfolios, gilts Thu 13 Mar: York - Tax Advantage of Direct Gilts Investing We hope to see you there! Can't join in person? Find out more about Direct Gilts and register for the playback online webinar here!  How are ESG focused indices different from traditional indicesESG indices take the same universe of companies as a traditional index but make rules-based systematic adjustments. For example, a set of ESG index rules might exclude companies with exposure to alcohol, tobacco, fossil fuels, weapons manufacturing, and adult entertainment. Furthermore, the rules might adjust the weighting of the company based on its ESG score. Why are ESG indices important?ESG indices are used by ESG-focused index tracking funds and ETFs. By comparing the performance of ESG focused indices and traditional indices we can see whether or not the ESG focus positively or negatively impacted performnace relative to traditional equity indices. Whilst pre-2022 some have argued for an ESG premium over the long-run (good companies should be well rewarded via a lower risk premium), since 2022 the hard reality of ESG relative underperformance compared to traditional equities is a reminder that any such premium is indeed "long-run", and in the meantime, short- and medium-term performance differentials matters too. What are the main differences between ESG focused indices and traditional indices?Whilst methodologies will vary from index to index, at a high level the key difference of ESG indices and funds to traditional indices and funds is:
When did ESG performance shine?The Covid era seemed like a golden era for ESG funds and they received record inflows. ESG focused world equity indices slightly outperformed their parent indices in 2020 at a time when the world stood still and the oil price briefly went negative. Investors could get similar or better returns, and have a clearer conscience. What changed in 2022?A combination of pent-up demand, monetary supply and then the Russia-Ukraine war and related sanctions and energy crisis marked the return of inflation. ESG focused funds excluded fossil fuels and materials and so did not hold "inflation protective" sectors that traditional equity indices continued to hold. We explored this further in our published inflation-related research at the time. Why were ESG funds less resilient to the inflation shock?Ironically, the exposures that do best in an energy shock and a higher inflation era, such as energy, materials, and commodities are the sectors that were excluded or low-weighted in ESG focused indices/funds. Similarly following the Russia/Ukraine war and heightened geopolitical risks, the defence sector has performed very strongly: this is part of traditional indices but not part of ESG indices. What is the difference for ESG indices pre and post Covid?In summary, ESG indices fared similarly to traditional indices pre-Covid, fared slightly better than traditional indices during Covid, and have fared worse than traditional indices since Covid. We are now living in a higher inflation era, with changing energy supply chains and an era of geopolitical insecurity. Furthermore with the new US Presidential administration under Donald Trump being pro-oil and less generous to clean energy, these trends could continue. How should advisers navigate clients' ESG preferencesIncreasingly advisers want or need to take clients' ESG preferences into account. Some clients may have a ESG preference, so long as returns are not compromised. Other clients may have a ESG preference as a priority over returns. Having an informed discussion about the differences between traditional and ESG investing can help explore these preferences in a more informed context. ESG is struggling in a world of energy supply changes and increased defence spendingThe chart below shows the performance lag between a Socially Responsible world equity ETF and a traditional world equity ETF. The ESG-focused Socially Responsible ETF started materaily underperfomring from December 2021, just before the Russia-Ukraine war and related sanctions disrupted energy supply chains and forced the US and Europe to rethink their need for defence spending.   How hard is it to beat the world equity indexA world equity index is hard to beat. And, according to the SPIVA studies, very few active global equity managers do so persistently. Listed Private Market Managers have persistently outperformed world equitiesAnd yet, an index-tracking fund that tracks an index of the largest listed private market managers (firms such as Apollo Global Management, Blackstone, Brookfield, KKR and 3i) has persistently outperformed a broader world equity index since 2008. This persistent long-term outperformance is one of the reasons we like including Listed Private Market Managers as an exposure within portfolios we consult on. What is the return premium for Private Market Managers?We refresh our regular study and find that the long-term (since 2008) premium of Listed Private Market Managers performance over Public Equities increased from +3.2% at end 2023 to +3.4% at end 2024. For investment committess targeting a net return of say World Equities +2%, net of fees, exposure to a simple Private Market Managers ETF has consistently delivered persistent alpha. How did Private Market Managers perform in 2024?In 2024, Private Market Managers was one of the best performing asset classes, returning +31.7%, compared to +17.3% for World Equities, both in GBP terms. What is the right "PME" benchmark for a private equity fund?This raises the question should private equity funds aim to deliver returns above public equities (represented by a world equity index), or should they aim to deliver returns above the returns of a listed private market managers index (on a public market equivalent ("PME") calculation basis)? We think the latter: but we don't expect many to accept the challenge. What are the risks?Unsurprisingly, Listed Private Market Managers is a higher beta index, relative to a world equity index. This means when markets are up, they go up more. When markets are down, they go down more. The performance of Listed Private Market Managers experienced a major dip in 2022 as interest rates rose rapidly. This was because of the exposure of private market funds to rising borrowing costs. This made the sector even more sensitive to rising interest rates than the Property or Infrastructure sector, within the Alternative Assets basket. What about the "illiquidity premium"?We prefer not to have exposure to illiquid funds in any portfolio we consult on for our UK financial adviser community. Why? Because we think the "illiquidity premium" is elusive: hard to harvest if things go well, and evaporating quickly if things do not. What does this mean for investment committees?
How can UK advisers get exposure?This exposure is readily available via a London-listed ETF launched back in 2007. There is nothing new about this exposure, but it is certainly worth taking a fresh look. For platforms that cannot trade ETFs, advisers can consider a Alternatives fund that includes an allocation to a Listed Private Markets Manager ETF. Find out more  What is driving gold prices?There are three key drivers of the gold price in 2024-25. Some of these trends are structural, some are more short-term. 1. Geopolitical Risk and "Risk-Off" DemandFirstly, gold is an uncorrelated asset class meaning that it is an accessible and liquid diversifier. It can act as a shock absorber during period of elevated geopolitical risk. So the recent uncertainty around Trump's tariff policies and what that could do to equity markets (earnings risk) and bond markets (inflation risk), makes Gold an "risk-off" Alternative. 2. Central Bank Buying: Structural Demand from Emerging MarketsSecondly, Central Bank buying: although the Western world has reduced the amount of gold it holds in Central Banks reserves, Developing Markets - such as China, India and Russia - have been buying physical gold, such that overall, Central Bank gold reserves are on the increase. This is has been a medium-term trend for BRICs countries to reduce their dependency on the Dollar. This is a medium-term structural trend. 3. Gold as a Store of Value and Inflation Hedge: Debt ConcernsFinally, a store of value and inflation hedge: as markets worry about debt indigestion - the oversupply of US Government Bonds and the long-term sustainability of Western e.g. US/UK debt levels, Gold is a "real asset" that preserves value should there be any risk of devaluation of debt securities. Gold is a "real" store of value because it also acts as an inflation hedge: whereas nominal Bonds cannot hold their real value when inflation rises, Gold tends to hold its value in real terms and has withstood inflation shocks through revolutions, wars and even back in Biblical times! This is a long-term structural trend. Find out more
 In a recent FTAdviser article, industry experts discuss the challenges facing investment trusts and the importance of strong internal governance.
Click here to read full article 
Register for the playback of this CPD webinar
About this CPD webinar In this webinar, we will explore the benefits of investing in direct gilts for high-rate taxpayers, focusing on their tax efficiency, capital gains tax exemption, and low-risk profile. We will also provide insights on building a gilts ladder to optimise returns, manage interest rate risk, and support short- to medium-term financial objectives. Direct Gilts are a smart alternative to cash deposits for high earners Adjusting for tax, the gross yield on certain near-term Gilts is far higher than the best Cash Deposit rates. And for customers sitting on high value deposits, and are worred about FSCS limits, why not invest directly with HM Treasury? DIrect Gilts make sense for higher rate taxpayers: particularly those who have made a business sale and have to plan out their tax liabilties. Investing in Direct Gilts requires technical knowledge But offering a gilts portfolio requires a detailed understanding of the structure of each individual gilts interest - coupon, yield and term. It's why advisers sometimes lose out to bespoke DFMs who can offer HNWI a direct gilts portfolio. Until now... Find out more about DIrect Gilts investing via platforms In this upcoming webinar on Direct Gilts Investment, we show UK advisers how they can offer a direct gilts portfolio or build a "gilts ladder" for their high earner clients via platforms, without the need to refer it away. We also contrast Cash Deposits, Money Market Funds and Direct Gilts. We explain key terms, the tax treatment and finally the research and support we can provide to financial advisers to support their proposition when recommending specific gilts to clients. Please join us for this new CPD module Our Direct Gilts Research for UK Advisers is coming soon... Another solution in the armoury in our effort to be the leading investment consultant that focuses on supporting UK advisers. FYI - we are launching our Direct Gilts research service at end February for advisers. All this will be FREE to our existing clients. For our regular readers who are not yet clients, we would welcome the opportunity to deepen our relationship! Please arrange a consultation or speak to your usual Elston contact.  The Bank of England, the UK's central bank, today cut rates by 25bp from 4.75% to 4.50% on weaker than expected economic growth. What is the market reaction?The market reaction is an increase in the FTSE 100 for two reasons: firstly lower borrowing costs are positive for corporate earnings, secondly Sterling has weakened on the news (reflecting the weaker economic growth outlook). Because FTSE 100 companies have predominantly USD-linked earnings, the translation effect makes the FTSE 100 look higher when Sterling weakens relative to the Dollar. What is the outlook for the UK economyWe focus on the three key macro drivers for the UK economy: Growth, Inflation and Rates. The Bank of England's central projections consistent with the MPC's forecast were changed as follows, relative to their November 2024 meeting: 2025 GDP Growth was downgraded from +1.50% to +0.75% 2025 CPI Inflation was upgraded from +2.75% to +3.50% The expected interest rate at the end of the three forecast period were increased from 3.50% to 4.00%. In summary this shows lower growth, higher inflation and higher terminal rates. (See chart) Might the Bank of England cut more?The Monetary Policy Committee (MPC) vote was 7-2 in favour of a 25bp cut. Interestingly 2 voted to cut rates even deeper by 50bp to 4.25% to support economic growth SummaryAfter being slow to respond to the inflation shock in 2022, it now looks as though the Bank of England may have overtightened relative to growth and is now exposed to "stagflation risk". Stagflation is when the economy is caught in a lower growth and higher inflation trap. This will be a challenge for policymakers to navigate.
Find out more about the Elston Smart-Beta UK Dividend Index (ticker: ELSUKI)
For latest UK Equity Income index factsheet click here UK Equity Income: monthly index commentary for January 2025 by Rob Davies, UK Equity Income Index Specialist at Elston Consulting The UK equity market started the new year well with a gain in mid-single digits for January. All sectors had positive returns ranging from low single digits for Utilities to high single digits for Information Technology, Energy and Industrial. Although the macro-economic background was not encouraging as forecasters pencilled in low economic growth for most regions apart from the US there were helpful aspects. Interest rates are still predicted to decline modestly as inflation remains benign, at least for the time being. Currencies were broadly neutral and even though oil gained a few percent in the middle of the month they settled back to end the period broadly unchanged. Forecasts for total dividends from the UK stock marker increased modestly over the month. The major positive impact came from the Oil sector which overcame reductions from mining stocks. For UK focussed companies the overriding concerns remain the lack of economic growth and having to adapt their businesses to cost pressures; much of it driven by tax. That, it seems, is largely being done by shedding labour. |
ELSTON RESEARCHinsights inform solutions Categories
All
Archives
March 2025
|
RSS Feed
Company |
Our Solutions |
|