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LIVE MARKETS-UK Plc: cheap and popular but are dividends sustainable?

Wed, 02nd Dec 2020 13:27

* Markets ignore UK vaccine roll-out

* STOXX 600 down 0.6%

* Pound suffers amid Brexit trade talks

* U.S. futures trade lower after record close

Dec 2 - Welcome to the home for real-time coverage of
markets brought to you by Reuters reporters. You can share your
thoughts with us at markets.research@thomsonreuters.com

UK PLC: CHEAP AND POPULAR BUT ARE DIVIDENDS SUSTAINABLE?
(1325 GMT)

The "Buy UK" trade is becoming more popular by the day it
seems and a favourable outcome of the post-Brexit trade
negotiations could provide it with an extra catalyst.

Cheapness is the main attraction and there's no doubt about
UK stocks being just that: cheap.

But what about dividends yields?

At above 3%, they are the highest in big developed markets
and represent another key feature of the case for buying UK Plc.

Can investors rely on that yield being sustainable?

Normal Villamin, CIO (Wealth Management) at Zurich-based
Union Bancaire Privée, says investors should be very selective.

"There are certain dividends that are interesting to us, the
mining sector on UK listed stocks looks quite good," he says,
recalling the sector's strong balance sheets and support from
rising commodity prices.

More broadly though, the recent history of UK dividends
isn't much inspiring, despite the high relative yield.

Alex Wright, portfolio manager at Fidelity, for example says
they are underweight energy and no longer have exposure to
Shell and BP after the UK oil majors cut their dividends and
embarked on a high-risk transition towards a diverse energy mix.

Meantime, the number of London listed companies that have
cancelled, cut, or suspended dividend payments since January has
risen 10% to 493, according to ETF provider GraniteShares.

And the immediate outlook doesn't look promising.

"The expected slowdown in GDP in the UK and in many other
countries in the fourth quarter means that companies may be
under additional pressure to preserve cash," says GraniteShares
CEO Will Rhind.

"It is likely that investors will face a long wait until
they see dividends return to their pre-Covid levels".

Third-quarter UK dividends fell nearly 42% on an underlying
basis to the lowest Q3 total in a decade, according to a report
last month by Janus Henderson, which on a more positive note
said some companies had started to restore payouts.

For 2021, Janus Henderson said much depended on the pandemic
with the big question being decision by regulators including in
the UK about bank dividends.

The chart below shows dividend yields by markets:

(Danilo Masoni, Elizabeth Howcroft, Julien Ponthus)

*****

LOOKING BEYOND ECB’S PEPP (1248 GMT)

There’s a lot on ECB’s plate on December 10, including an
increase and extension of its purchase programme, a possible
‘verbal intervention’ on the euro dollar exchange rate and an
unlikely-seen interest rate cut.

But some analysts argue that the central bank should clarify
what is going to happen when the Pandemic Emergency Purchase
Programme (PEPP) is over.

“The ECB would be more effective if it could address its
recent communication problems,” a BofA research note says.

“In the context of the Strategy Policy Review next year,
clarify how quantitative easing can continue after the pandemic
emergency purchase programme,” it adds.

The ECB could extend the PEPP for a number of years, Bofa
says, adding “some analysts have suggested that the ECB should
move to some form of yield targeting.”

BofA economists expect from next week's ECB meeting 500
billion euros of additional PEPP extended to end 2021 from
mid-2021, coupled with more generous terms for targeted
longer-term refinancing operations (TLTROs).

ECB board member Isabel Schnabel said in an interview
published yesterday that extending the ECB's PEPP by 12 months
to June 2022 was one of the options on the table, adding the ECB
has to maintain financing conditions as they are, even if that
means disappointing financial markets.

BofA agrees with other analysts that ECB can do little to
directly affect the euro, also because a new interest cut seems
to be off the table, at least for now.

Then it also wonders “how the central bank can meet its
inflation target when the temporary PEPP program ends.”

(Stefano Rebaudo)

*****

ROOM FOR GROWTH (1202 GMT)

Global stocks have surged in November since Pfizer's vaccine
announcement. Yet, as the UK said this morning it will start
rolling out a vaccine as soon as next week, European stocks
failed to show any fresh excitement, with STOXX 600 current down
0.25%.

Is this it? Has all the vaccine euphoria been priced in?

According to Axa's investment outlook released today, there
is still plenty of room for equity growth as the world turns
back to normal if a vaccine gets largely distributed next year.

Global earnings per share growth in 2021 are seen running at
around 28%, close to 2019 high-water mark, it says.

"Looking past the near-term outlook, in a world with
negative to-low returns, equities continue to look attractive
from a risk-reward perspective for long-term-oriented
investors," it adds.

"The asset class still appears attractively valued on a
relative basis with equity risk premium proxies (at around 5%-
see chart below) still having room to compress," strategists at
Axa write.

(Joice Alves)

*****

SANTA RALLY OR RANGEBOUND MONTH AHEAD? (1126 GMT)

After record breaking November how will December 2020 be
remembered in stock traders' almanacs?

One way to forecast the future is to look back and after
wading through past seasonal moves and combining it with data on
positioning and expectations that there will be slightly less
market moving news, Citi comes to a few conclusions.

The outlook for equities is calmer, while a Santa Rally
looks unlikely except perhaps for the FTSE, it says.

"December is beginning to resemble a month of range-bound
trading, with lower volatility, perhaps offering a bit of
relief, against what can only be described as an intense year
for equities," analysts at the U.S. bank say.

"December monthly seasonality is strongest in the FTSE 100
and less pronounced across US markets," they say.

The FTSE has been up more than 2% on average in December
over the past 15 years, while the S&P has gained just 0.5%, as
you can see in these two Citi charts below.

(Danilo Masoni)

*****

EUROPE DIPS AT THE OPEN DESPITE UK VACCINE ROLL-OUT (0852
GMT)

There's been no fireworks to welcome the news millions had
been desperately waiting for.

European stock markets, including London, opened lower after
Britain became the first country in the world to approve the
Pfizer-BioNTech COVID-19 vaccine and said that it will be rolled
out from early next week.

There's a consensus to say that markets have been pricing
the good news since the beginning of November and that the lack
of reaction this morning was to be expected.

"Stock market reactions following the Pfizer and Moderna
announcements already reflect bets of a rapid normalization",
Sylvain Goyon, head of equity strategy at Oddo BHF in Paris,
just told us.

"To this extent the UK registration is somewhat already
priced in", he added.

Cyclical stocks, the segment which has the most benefited
from the vaccine hopes lately, are weighing the most.

Autos are down 1.1% and chemicals are losing 0.9%.

If the FTSE 100, which is flat, is doing slightly better
than the STOXX 600 (-0.4%) it's probably due to the pound which
is down 0.4%.

An attempt to put Brexit talks in a so-called tunnel, where
both sides privately hammer out the final details without
commenting publicly, appears to have failed, the chief political
commentator of Times Radio said, adding pressure to the
currency.

The top mover up is G4S, up 7% after Canada's GardaWorld
sweetened its bid.

(Julien Ponthus)

*****

COMFORT AND JOY! (0751 GMT)

Hat tip to Rabobank for their description of yesterday's
session - "Tidings of comfort and joy".

Those tidings consisted of more positive news on the
coronavirus vaccine front, on Brexit talks and on a possible
bipartisan U.S. spending package proposal of almost $1 trillion.

The joy -- stocks and bitcoin notched up fresh highs --
while an ultra-bearish positioning kept the greenback at 2-1/2
year lows.

Some of the air has been let out today, with U.S. and
European equities set to open a touch lower and Treasury yields
flattening after yesterday's 8 basis-point rise. Still
inflation-adjusted U.S. 10-year yields are around 1.8%, the
highest since May 2019.

But the mood overall remains buoyant -- not least led by
massive merger and IPO deals. The latest is Salesforce.com's
deal to buy workplace messaging app Slack in a $27.7 billion
deal, coming on top of an even bigger plan by S&P Global on
Monday to buy IHS Markit for $44 billion.

More stimulus is also on the way -- aside from the U.S.
package, Bank of Japan's deputy governor said the bank could
extend a corporate funding facility beyond March.

Finally, news from Britain -- it became the first country in
the world to approve the Pfizer-BioNTech vaccine with plans to
roll it out from next week.

On Brexit, EU chief Brexit negotiator Barnier is to update
EU representatives at a briefing - sterling is hovering around
$1.34 on news talks have entered the so-called tunnel stage.

Here are some corporate events and data that could drive
markets on Wednesday:

- Debenhams to shut all its shops, marking the end of its
242 years run in UK retail

- French perfume maker Interparfums ups sales outlook
slightly. Low cost airline Wizz reported an 85% drop in November
passenger numbers

- Bitcoin takes another shot at scaling $20,000

- U.S. Federal Reserve Releases Beige Book

- ECB's Philip Lane to speak at the online Thomson Reuters
Global Investment Summit

(Sujata Rao and Thyagaraju Adinarayan)

*****

VACCINE IN THE UK NEXT WEEK: FUTURES DON'T CARE! (0739 GMT)

Seriously, what else could be on top news this morning other
than this cool newsflash:

02-Dec-2020 07:00:04 - UK GOVT - THE VACCINE WILL BE MADE
AVAILABLE ACROSS THE UK FROM NEXT WEEK

Markets have been living out of hopes for a game changer for
months and that day has finally arrived.

The reaction couldn't be more muted though!

At the moment, FTSE futures are down 0.3%, so not
particularly jumping for joy, a sign perhaps that an effective
vaccine had already been priced in.

That being said, a roll-out of the vaccine as soon as next
week must come as a relief to many investors.

UK stocks will be closely watched this morning, mostly those
in all COVID-19 hit areas such as pubs of course and all the
travel and leisure industry.

The damage caused by the pandemic is however still very much
present across Europe, with for instance Hungarian low cost
airline Wizz Air reporting that passenger numbers were down 85%
in November compared to the same month last year.

(Julien Ponthus)

*****

EUROPE IN THE BLACK, BUT IN A CAUTIOUS MOOD (0628 GMT)

The European stock futures are opening in the black, but
investors seem more willing to take some profit off the table
after equities closed their best month ever.

Risk-appetite increased across the board as it seems we are
stepping into a risk-free 2021 but part of the good news has
been priced in, including an effective vaccine and its expected
positive economic impact.

Asian stocks are higher after China's factory sector
accelerated at the fastest pace in a decade in November,
according to a business survey.

(Stefano Rebaudo)

*****

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