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How a falling £ could boost UK shares

Why investor confidence in UK dividends is growing.


The main indices (a benchmark representing the value of a market’s shares or bonds) of UK shares hit an all-time high at the start of 2017. Many private investors might be wondering where to use their ISA allowance of £15,240 before the end of the tax year on 5th April 2017. On the one hand, you would not want to forego the significant tax benefits of the annual ISA. On the other hand, is it prudent to put money in the stock market after the recent surge in share prices?

The rise in UK share prices since the referendum on Brexit is logical. It reflects the fall in the value of sterling or the British pound against overseas currencies. On 23rd June 2016, the exchange rate between the pound and the US dollar was £1 = $1.49.There has since been an appreciation of around 18% in the US dollar to leave the exchange rate at £1 = $1.22. Against the Euro, the fall in the pound has been 12%.

We believe the fall in the pound is beneficial for UK shares because around 70% of the sales of quoted UK companies come from overseas. The value of these overseas sales (and profits) is boosted by the devaluation when translated back into British pounds. In addition, those British companies that export will have their competitiveness improved although this is partly offset by other companies, such as retailers, who will have to pass on, at some stage, the higher cost of imported goods to their customers.

Given the amount of sales and profits earned overseas by UK listed companies, a significant number pay their dividends in overseas currencies (mainly US dollars). These tend to be the larger companies and they account for 45% of total UK dividends paid last year. The value of these dividends paid in overseas currencies from UK listed companies has risen in sterling terms as a result of the fall in the pound. According to the strategy team at Baden Hill Sanlam, a research provider, ordinary dividends for the UK’s FTSE All Share Index rose by 4.2% in 2016 over the previous year. However, without the currency devaluation, total dividends would have fallen by around 1%.

The other key factor that underpins greater confidence in UK dividends is the recovery in the prices of commodities (physical goods such as oil, gold or wheat). Metal prices rose in 2016 with better than expect economic growth in China. Mining companies are likely to restore dividends in 2017 that had been cut in 2016. The oil price benefited both from global growth and also from determination of OPEC  to restrict some supply of oil production. BP and Royal Dutch Shell’s dividends are considerably more secure with the oil price at over $50 BBL when compared with below $30 BBL reached in the first quarter of 2016.

Since 1991 I have managed City of London Investment Trust, which is predominantly invested in UK equities and has grown to have assets of £1.36 billion (at 31st December 2016.) While we have large holdings in BP and Royal Dutch Shell, we have less than the average for the UK indices given their sensitivity to the oil price and the risk of having too much in any one stock. This was well illustrated in 2010 when the Macondo oil spill caused BP to stop paying its dividend for a while and led to it having to pay large fines in the US.

City of London’s portfolio is diversified with investments in 117 companies (at 31st December 2016) including those in sectors such as telecommunications, consumer staples, financials and housebuilders. As an investment trust, it has the ability to retain up to 15% of its income in any one year, building a revenue reserve which can be used to support its dividend during difficult years when there are dividend cuts across the market. Though not a guide to the future, this has enabled it to grow its dividend each year for the last 50 years, the longest of any vehicle in the UK.

All in all, the UK equity market is offering a dividend yield of 3.4%* (FTSE All Share Index) which is attractive relative to the main alternatives such as 10 year gilts (or UK government bonds) yielding 1.35%* or bank deposit rates, anchored by the UK base rate at a paltry 0.25% (*source: Financial Times 19th January 2017.) While equities are inevitably more volatile than other asset classes, the income attraction of UK equities is currently considerable. This may give comfort for the patient investor in the context of the many political and economic uncertainties.


The above example is intended for illustrative purposes only and is not indicative of the historical or future performance of the strategy or the chances of success of any particular strategy.

​Past performance is not a guide to future performance.

The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.

Nothing in this document is intended to or should be construed as advice and you should satisfy yourself as to its suitability and the risks involved, you may wish to consult a financial adviser.

This document is not a recommendation to sell or purchase any investment. It does not form part of any contract for the sale or purchase of any investment.

Issued in the UK by Henderson Investment Funds Limited (reg. no. 2678531), incorporated and registered in England and Wales with registered office at 201 Bishopsgate, London EC2M 3AE, is authorised and regulated by the Financial Conduct Authority to provide investment products and services. 


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The EU’s willingness to take on Google shows just how stupid Brexit is

Outside the union the UK will be in a far weaker position to stand up for its citizens.

Google’s record €2.4bn (£2.12bn) fine for breaching European competition rules is an eye-catching example of the EU taking on the Silicon Valley giants. It is also just one part of a larger battle to get to grips with the influence of US-based web firms.

From fake news to tax, the European Commission has taken the lead in investigating and, in this instance, sanctioning, the likes of Google, Facebook, Apple and Amazon for practices it believes are either anti-competitive for European business or detrimental to the lives of its citizens.

Only in May the commission fined Facebook €110m for providing misleading information about its takeover of WhatsApp. In January, it issued a warning to Facebook over its role in spreading fake news. Last summer, it ordered Apple to pay an extra €13bn in tax it claims should have been paid in Ireland (the Irish government had offered a tax break). Now Google has been hit for favouring its own price comparison services in its search results. In other words, consumers who used Google to find the best price for a product across the internet were in fact being gently nudged towards the search engine giant's own comparison website.

As European Competition Commissioner Margrethe Vestager put it:

"Google has come up with many innovative products and services that have made a difference to our lives. That's a good thing. But Google's strategy for its comparison shopping service wasn't just about attracting customers by making its product better than those of its rivals. Instead, Google abused its market dominance as a search engine by promoting its own comparison shopping service in its search results, and demoting those of competitors.

"What Google has done is illegal under EU antitrust rules. It denied other companies the chance to compete on the merits and to innovate. And most importantly, it denied European consumers a genuine choice of services and the full benefits of innovation."

The border-busting power of these mostly US-based digital companies is increasingly defining how people across Europe and the rest of the world live their lives. It is for the most part hugely beneficial for the people who use their services, but the EU understandably wants to make sure it has some control over them.

This isn't about beating up on the tech companies. They are profit-maximising entities that have their own goals and agendas, and that's perfectly fine. But it's vital to to have a democratic entity that can represent the needs of its citizens. So far the EU has proved the only organisation with both the will and strength to do so.

The US Federal Communications Commission could also do more to provide a check on their power, but has rarely shown the determination to do so. And this is unlikely to change under Donald Trump - the US Congress recently voted to block proposed FCC rules on telecoms companies selling user data.

Other countries such as China have resisted the influence of the internet giants, but primarily by simply cutting off their access and relying on home-grown alternatives it can control better.  

And so it has fallen to the EU to fight to ensure that its citizens get the benefits of the digital revolution without handing complete control over our online lives to companies based far away.

It's a battle that the UK has never seemed especially keen on, and one it will be effectively retreat from when it leaves the EU.

Of course the UK government is likely to continue ramping up rhetoric on issues such as encryption, fake news and the dissemination of extremist views.

But after Brexit, its bargaining power will be weak, especially if the priority becomes bringing in foreign investment to counteract the impact Brexit will have on our finances. Unlike Ireland, we will not be told that offering huge tax breaks broke state aid rules. But if so much economic activity relies on their presence will our MPs and own regulatory bodies decide to stand up for the privacy rights of UK citizens?

As with trade, when it comes to dealing with large transnational challenges posed by the web, it is far better to be part of a large bloc speaking as one than a lone voice.

Companies such as Google and Facebook owe much of their success and power to their ability to easily transcend borders. It is unsurprising that the only democratic institution prepared and equipped to moderate that power is also built across borders.

After Brexit, Europe will most likely continue to defend the interests of its citizens against the worst excesses of the global web firms. But outside the EU, the UK will have very little power to resist them.

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