Tatton Weekly: One year on from the last stock market correction; 2017 could see another boost from the weak pound; The UK economy: mind the gap

One year on from the last stock market correction;  The UK economy: mind the gap;  US Fed demonstrates reassuring business as usual attitude;  The ‘UniKraft pantomime’ – madness or system?;  UK dividend investors benefitted from weak Pound: 2017 could see another boost

One year on from the last stock market correction

While this may lead to a very positive impression of economic progress potential and thus further corporate earnings growth – which should reflect positively in stock market valuations – there are also more potential headwinds on the horizon than the currently bullish market sentiment may be willing to see. The risks of ill-guided decisions by the Trump administration to global trade and of acrimonious divorce proceedings between the UK and its EU trading partners have not yet led to a noticeably negative economic decision making impact. This is encouraging, but means by no means that it never will.

The UK economy: mind the gap

If nothing else, there appears to be an unsustainable “gap” emerging between the current level of consumer spending and the future level of spending as suggested by the recent employment and wage data. Neither wage growth nor inflation would support the current level of consumer spending.

US Fed demonstrates reassuring business as usual attitude 

It is, however, important to point out that the rate at which the US is pushing ahead is starting to let up. Despite the four-week average for unemployment claims falling last week, the actual claims themselves increased on the previous week, while the unemployment has risen 0.1% for the last two months. If this plateau continues, and the effects of Trump’s promised fiscal policies continue to lag, raising rates too quickly could result in unwelcome disruption.

The ‘UniKraft pantomime’ – madness or system?

Insight by Chris Swanepoel, Tatton’s resident company analyst and head of AIM investment

For the last 8 years or so, we’ve seen corporates adding value by using ultra-cheap rates to ramp up their debt to buy-back their own stock. While there are sometimes sound financial (and accounting) reasons for buying their own stock, generally the rash of corporate debt to fuel stock buybacks has added nothing to the global stock of factories, jobs created or corporate value. It’s pushed up corporate valuations – financial asset inflation being very beneficial for CEOs and senior execs’ bonuses.

UK dividend investors benefitted from weak Pound: 2017 could see another boost

Analysts estimate that a whopping 90% of the £5.2 billion Q4 payout increase was a result of the fall in the pound. from a UK perspective, investors benefitted from the fall in the value of the pound, which boosted payouts by a record £5.2 billion in Q4 2016. We believe it likely that Sterling will remain low and potentially continue to fall in 2017, a result of the UK’s uncertain economic framework setting as Brexit negotiations begin. Further Sterling weakness could therefore provide another dividend boost to UK investors this year

Read the full Tatton commentary here