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OPINION

Defensives remain on the defensive in 2018

Defensives remain on the defensive in 2018
February 27, 2018
Defensives remain on the defensive in 2018

Part of the reason why many western indices have defied gravity over the past year is the support provided through capital distribution. The UK saw double-digit growth in the dividend payout, even when special dividends and currency effects are disregarded. This was partly due to the domestic weighting towards resource stocks, as the recovery in commodity prices fed through to a step-up in dividend payments. With prices for copper, a general bellwether for the extractive industries, forecast to contract by around a fifth through 2018, there will be no comparable shot-in-the-arm this time around, although shareholder returns in the financial sector are likely to ratchet up if interest rates start to rise.

Analysts at Deutsche Bank thought there was a possibility that Royal Bank of Scotland (RBS) might reinstate its dividend, but an impending hit from the US Department of Justice (DoJ) seems to have put paid to that notion, at least temporarily. RBS, which has been in the dock over allegations of mis-sold mortgage-backed securities, is in good company with the likes of Deutsche Bank, Bank of America and Credit Suisse all feeling the wrath of regulators on that score.

We may never know the full extent of the possible contagion from the scandal, partly because of the difficulty in quantifying the risk for the market in related credit default swaps, but the aggregate fines and compensation payments levied on the banks over the past decade are simply eye-watering. Last year, data collated by the CCP Research Foundation showed that 20 of the world’s biggest banks were on the hook for £264bn through 2012-16 – a one-third increase over the preceding five-year period. Estimates differ, but it’s thought that the main UK banks have had to allocate around 10 per cent of revenues to atone for their transgressions in recent years. Even Lloyds Banking (LLOY), which hiked its annual dividend by a fifth on improved capital generation, was forced to increase the provision for PPI costs by a further £1.65bn in 2017 – when will it all end?

Anyway, the point is that while results from the main four high-street banks were something of a curate’s egg, we can say that income prospects for the sector have certainly improved. (News reaches us that Bank of Ireland plans to pay a dividend of 11.5¢ per share in its first payment to investors in a decade even as underlying profits flatlined). A recovery in the banking payout ratio would obviously prove beneficial to income seekers, but the Charles Stanley research reveals that consensus expectations have the FTSE 100 registering earnings growth of 8 per cent this year, with energy, technology and telecoms the likely best performers, while healthcare and utilities are expected to experience an earnings decline.