The latest interactive investor poll to gauge investor sentiment amid the Covid-19 pandemic has found that sentiment to UK shares has reached a new low as the UK dividend drought continues.
Investors could be heading into what has been described as a “dividend bear market.” Duncan Lamont, head of research and analytics at Schroders says: “Dividends are expected to be slashed by 25% to 50% across the globe this year compared with 2019. This will be an unwelcome (if not entirely unexpected) development for many stock market investors.
“Our analysis of nearly 150 years of data on the S&P 500 index of US stocks shows that bear markets for dividends like this – where dividends fall by at least 20% – are a rarity. There has only been one other since the end of World War II. This occurred during the Great Financial Crisis (GFC) when dividends fell by 24%.
But it is not all doom and gloom.
Diversification is key
Some investors have been looking to diversify their portfolios not only from shares to investment trusts and funds for more attractive returns but also geographically. According to recent research from interactive investor, investors more than ever are choosing to increase their stock market exposure overseas (54%, compared to 35% just three months ago).
Keith Bowman, equity analyst, interactive investor, says: “The move by investors from shares to investment trusts and funds comes at time of heightened risk and uncertainty, with collectives potentially offering an arguably less volatile entrance back into markets
“A switch from UK to US stocks may signify investors perceived reliability for US companies, particularly technology stocks. The likes of Amazon and Netflix are both considered Covid-19 winners.
“Increased investor confidence in adding to their investment portfolios comes at a time when the full might of Central Banks has been placed behind markets.
“Hopes for a vaccine and light at the end of the tunnel may also be fuelling investor confidence.”
Despite stock markets having made up some of their losses over the past month or so, there has been a 15-percentage points jump since last month to 62% in respondents thinking the FTSE 100 becomes a buy at 5,000. The rest (38%) are waiting for below 4,500.
With a UK dividend drought, it is interesting to see a spike in popularity of Asian, Emerging Markets and European shares which reached survey highs of 10%, 6% and 7% respectively.
The US market, which has been boosted by the performance of technology stocks during the global coronavirus lockdown, has cemented its position as the second most favoured region for those increasing their stock market exposure, reaching a high of 19%.
Picking up a bargain?
Meanwhile, although investors are still tending to favour direct shares to take advantage of buying opportunities (50%), there has been a surge in popularity for investment trusts.
However, a word of warning. Investors trying to turn a quick profit by buying up “bargain” investment trusts must avoid “value traps” that could hurt their savings.
Share price discounts – when the price values the trust at less than the worth of its underlying assets – peaked in March, according to statistics from the Association of Investment Companies (AIC). The average discount was 18.4% on March 23rd, surpassing the global financial crisis peak of 17.6%.
As stock markets recover, many trusts are back to trading around par or at a premium. For example, Scottish Mortgage Investment Trust – dropped to a 15% discount in March, but now trades at a 3% premium.