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What Fidelity’s equity income managers expect from 2015

27 November 2014

Fidelity’s Michael Clark, Dan Roberts and Polly Kwan reveal where they see opportunities in equity income investing for the coming year.

By Daniel Lanyon,

Reporter, FE Trustnet

Investors have flocked to income generating funds and equities more so than other type of risk asset in recent years.

The trend has numerous causes. The meagre cash interest rate offering not even an ability for savers to beat inflation, a move to more defensive businesses and a broader demographic trend that has swelled the ranks of retirees are the most likely culprits.

Here, three Fidelity managers outline what they expect will lead the way for equity income investors.


UK equity income

Michael Clark (pictured), portfolio manager of the Fidelity Moneybuilder Dividend fund, says a continuing and strengthening economic recovery will support UK equity markets as signs emerge that a long-term decline in real consumer incomes is beginning to reverse.

ALT_TAG “So I think that in 2015 this pattern of good economic growth will drive corporate earnings upwards, and that in turn will drive share prices higher. The stock market is valued on 14x estimated 2015 earnings, with a yield for 2015 of 3.72 per cent,” he said.

“Many stocks, notably the larger names, yield substantially more than average, with between 5 per cent and 6 per cent common in oils, pharmaceuticals, banking and insurance. That is very reasonable when set against the historical average and substantially better value than fixed income markets.”

“Dividends generally remain secure, and with economic growth improving, dividend growth may be better than expected.”

He says growth in Asia and the US will surpass expectations while western Europe will expand more slowly than in recent years with any interest rate rises muted.

“Since the rate of inflation remains very subdued, we are unlikely to see destabilising moves upwards in interest rates. I am fairly sure that they will rise, but we will not see a damaging squeeze. So while there may be volatility at the time of the increase, this should be short-lived and contained.”

However he warns that political instability could be an issue in the UK around the 2015 general election but believes that the likelihood of a major problem is low.


Global income

Dan Roberts, portfolio manager of the Fidelity Global Dividend fund, says developed world’s best performing equity market – the US – has become expensive.

“While US GDP growth has proved robust if somewhat uninspiring, the optimism that surrounded both Japan and Europe at the beginning of the year has receded and been replaced with fears of disinflation and recession. Against this backdrop, the relative performance of the respective indices is perhaps no surprise,” he explained.

“At the corporate level, aggregate profitability looks unsustainably high and we have – again – seen earnings growth expectations revised downwards as the year progressed.”

“I would expect this trend to continue into 2015 so we need to be careful when looking at valuations struck off earnings forecasts 12 months hence.”

Performance of indices in 2014

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Source: FE Analytics


This has led Roberts to be wary of the broader market but he maintains that opportunities still exist in value stocks across certain regions.

“While I can make some observations on aggregate market level valuations – the US looks the most expensive, Europe and [emerging markets] look relatively attractive and Japan is ‘back in the pack’ after a 25-year de-rating - I think this misses subtleties in the make-up of the respective markets and relative stock level valuations.”

“I still believe there are stocks and sectors that offer an attractive risk-reward and a strategy focused on resilient income producing equities offers the best prospect of healthy longer-term returns.”


Asian income

Polly Kwan, portfolio manager of the Fidelity Asian Dividend fund, says expectations of interest rate hikes from central banks will indisputably be one of the key themes for 2015.

“While most market participants expect the first US interest rate hike to take place by June 2015, I believe interest rates will stay low for longer in view of mixed economic data from the US,” she said.

She says while growth in China is slowing she remain positive on as valuations are more attractive than a year ago with risks already priced in.

“I also see more interesting investment opportunities in India as favourable policy initiatives introduced by the new government should boost equities in the country,” she added.

“Meanwhile, although Australia is a very attractive market from a stable dividend perspective, I remain cautious as a stronger US dollar may weaken the earnings outlook of Australian companies.”

She says high-dividend paying stocks could come under pressure due to heightened expectations for interest rate increases.

However, companies with good dividend policies and strong dividend growth potential are likely to outperform in the current market environment.

“In particular, Asia’s dividend paying culture has significantly improved in recent years, with companies taking a more balanced approach between operations and capital management. Against this backdrop, I will focus on identifying companies that can offer good dividend growth potential, rather than stable dividend alone,” the manager said.

“At a sector level, I increased the exposure to commodities, as these companies have the potential to improve dividend yields given better capital management. I also like healthcare companies as they have strong dividend growth potential.”

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