The UK stock market is currently yielding over 4%, an absolute level of yield rarely seen outside of recessions, suggesting that much of the gloom surrounding no-deal is already reflected in share prices.
This presents would-be investors with a compelling income opportunity, especially when compared to the yields of other competing asset classes.
Cash and government bond yields are practically non-existent and in many cases companies’ shares are yielding substantially more than their own corporate bonds.
When assessing the merits of fixed income investments, investors should remember that UK inflation has not disappeared and is likely to be boosted by another fall in the pound on the foreign exchanges.
Currently, a portfolio of higher yielding, listed UK shares is presenting investors with a very unusual opportunity – around a 5% yield with the potential for long-term income and capital growth ahead of inflation.
A certain amount of bravery is required given the dismal political background and slowing economic growth, but long-term investors can take heart from the fact that over the last three decades investment in the UK stock market has never produced a negative return over the next ten years when the initial yield has been over 4%.
In fact, the lowest subsequent return over the next decade when the market has yielded over 4% has been over 6% per annum, i.e. the worst that investors have done from such a valuation is a near doubling of their money over the next ten years.
Add in the potential for outperformance from higher yielding equities and the attractions of UK equity income unit trusts should be readily apparent.
While a no deal Brexit may still result in economic disruption, planning and establishing a sensible tariff schedule will provide businesses with clarification on future EU trading.
This should remove some of the uncertainty surrounding business investment decisions. Future trade deals and an expansionary budget would help alleviate any “no deal” economic pain.
The fortunes of the UK stock market should not be confused with that of the UK economy. Barely a third of the profits of UK listed companies are derived in the UK and half of all their dividends are declared in either dollars or Euros.
Any no-deal inspired weakness in the pound would be of direct benefit to UK income investors, who would see the sterling value of their dividend payments rise immediately.
The fall in the value of the pound following the EU referendum was at least partially responsible for the super-normal burst of dividend growth seen in 2017 and illustrates the way in which the currency acts as a shock absorber for investors.
Patrick Harrington is director and investment manager at OLIM Investment Managers. He co-manages the SVS Albion OLIM UK Equity Income fund which over the past three years has returned 25% versus a peer average of 20.1%.