Investment planning; September inflation numbers, NS&I provisional results and more

• The heavy borrowing goes on
• September inflation numbers
• UK dividends: Faint signs of recovery
• NS&I provisional results 

 

The heavy borrowing goes on

(AF4, FA7, LP2, RO2)

Another month of Government borrowing above £30bn has been recorded.

On the day the Chancellor revealed that the forthcoming Spending Review would (again) only cover the next year rather than the usual three years, the latest Public Sector Finances data were released by the Office for National Statistics (ONS). They are a continuation of the red ink story that is 2020/21:

• The public sector net borrowing requirement (PSNBR) in September 2020 is estimated to have been £36.1bn, £28.4bn more than a year ago and the third-highest borrowing figure in any month since records started in 1993. The figure was higher than predicted by any of the economists polled by Reuters, but still, £3.1bn lower than the Office for Budget Responsibility (OBR)’s July Financial Stability Review (FSR) central scenario projection.

• For the first half of this financial year, total borrowing amounted to £208.5bn. The ONS reduced its estimate of August borrowing by £5.8bn, but its other tweaks included an increase to July’s borrowing of £7.6bn. The variations are a reminder of how early data needs to be treated with caution: adjustments will happen.

Inevitably, the first half outturn was the highest borrowing for that period on record. In cash terms it was £174.5bn up on 2019/20 – or six times last year’s figure. Compared with the peak of the financial crisis, the OBR observes that the current halfway figure is £51bn higher than borrowing for the whole of 2009/10.

The corresponding OBR FSR projection at this stage was £262.7bn, £54.2bn higher. In its review, the OBR says about a third of this is because it allows for projected write-offs worth £17.7bn to date on Government guaranteed loans, not yet incorporated on the ONS data. The other two-thirds are down to lower than projected central Government spending and stronger HMRC cash receipts over June to September. The latter is ‘partly down to timing effects, with some of the [tax] arrears built up at the start of the year being repaid sooner than assumed. But it also reflects the unexpectedly sharp recovery in real GDP through the summer.’

• Overall Government debt rose to £2,059.7bn, £259.2bn (14.4%) higher than a year ago. As a percentage of UK GDP, debt rose to 103.5% in September against 80.5% a year ago.

• In terms of financing, the OBR notes that to the end of September the Debt Management Office (DMO) had sold £306bn of gilts, 79% of its £385bn target for April-November. At the same point in the financial year, the Bank of England had bought £268bn of (different) gilts under its latest (£300bn) round of quantitative easing (QE). To quote the OBR, ‘So, in effect, the Bank has purchased just £138 billion less from the private and overseas sectors than the DMO has issued (but almost the same on a net basis)’. Watch out for more QE when the Bank’s Monetary Policy Committee makes its rate announcement on 5 November.

The OBR’s July projections assumed that monthly borrowing would be falling by now and continue to do so until January 2021 delivered a surplus. The second wave of the pandemic and the measures the Chancellor has announced in response suggest that the OBR’s first half pessimism on borrowing may turn out to be balanced by optimism about the second half of the fiscal year.

Source: ONS 21/10/20 OBR 21/10/20

September inflation numbers

(AF4, FA7, LP2, RO2)

The all-important rate of CPI inflation in September was 0.5%.

The CPI for September rose 0.3% to an annual rate of 0.5%, 0.1% lower than market expectations. Across August to September prices rose by 0.4%, whereas they increased by just 0.1% over the same period last year.

The CPI/RPI gap doubled to 0.6%, with the RPI annual rate rising from 0.5% to 1.1%. Over the month, the RPI was virtually unchanged.

The Office for National Statistics (ONS)’s favoured CPIH index was up 0.2% for the month to 0.7%.

The September CPI figure is an important benchmark for indexation of some tax allowances and DWP benefits. However, in a time of pandemic, the Chancellor may choose to ignore most such increases in favour of adding (marginally) to his coffers by dint of fiscal drag.

The one benefit that looks more than likely to receive an increase is the state pension. Following on from the hastily introduced Social Security (Up-rating of Benefits) Bill, under the Triple Lock principle, the basic state pension and new state pension should both rise by 2.5% in April 2021 to £137.65 a week and £179.60 a week, respectively.

The number of items in the CPIH ‘shopping basket’ that were unavailable to consumers in the UK remained at eight (or 1.1% of the CPIH basket by weight) in September. The ONS says that it “collected a weighted total of 90.2% of comparable coverage collected previously”, up 3.3% on August.

The ONS highlights the following as the more significant of the moves causing the drop in the CPIH inflation rate:

Upward

Transport Perhaps surprisingly, the largest upward contribution (of 0.23%) to the change in the CPIH 12-month inflation rate came from this category and, in particular, airfares were to blame for over half of it. As normally happens, overall transport costs fell between August and September 2020, but, given the unusual July-August fall last month, the latest drop was less than between the same two months a year ago. While travel restrictions are in place, the ONS is only collecting prices for those countries exempt from Foreign, Commonwealth and Development Office (FCDO) restrictions.

Restaurants and hotels Within this group, the end of the Eat Out to Help Out scheme saw prices of catering services rise by 4.1% between August and September 2020, compared with a rise of 0.2% between the same two months in 2019. The ONS notes that the 5.7% fall in prices between July and August 2020 has ‘not entirely been reversed’ with some continuing effect from the temporary VAT reduction. The upward contribution from restaurants and hotels was also partially offset by a large downward contribution from accommodation services, in particular hotel overnight stays, where prices fell by 5.5% between August and September 2020, compared with a 7.7% rise between the same two months a year ago.

Downward

Furniture, household equipment and maintenance In this category overall prices rose by 0.2% between August and September this year, compared with a rise of 1.1% between the same two months a year ago. There were downward contributions across the broad group, especially from furniture, furnishings and carpets as well as glassware, tableware and household utensils.

Recreation and culture Overall prices rose by 0.2% between August and September 2020, compared with a larger rise of 0.5% between the same two months a year ago. Once again, computer games seem to hold the key. The ONS says that while computer games have tended to rise in the autumn as new games are released ahead of Christmas, between August and September 2020, prices have either fallen or only increased slightly.

Only three of the twelve broad CPI groups saw an annual inflation increase, while the other nine categories posted a decrease. The category with the highest inflation rate remains Communications at 3.4% (down from 4.1%).

Core CPI inflation (CPI excluding energy, food, alcohol and tobacco) rose by 0.4% to 1.3%. Goods inflation fell from -0.2% to -0.3%, while services inflation jumped from 0.6% to 1.4%.

Producer Price Inflation was -0.9 % on an annual basis, unchanged since June on the output (factory gate) measure. Input price inflation rose 1.9% to -3.7% year-on-year. The main driver here was crude oil prices. 

Source: ONS 21/10/2020

UK dividends: Faint signs of recovery

(AF4, FA7, LP2, RO2)

UK dividends fell by almost half in the third quarter, year-on-year, but the worst may be over.

 

The Q2 2020 quarterly Dividend Monitor from Link Asset Services made grim reading for income seekers, with total UK dividend payouts running at only 42.8% of their Q2 2019 level. Later research from Janus Henderson revealed that the UK had seen the worst Q2 drop of major markets, with the global decline put at 22%. The Q3 2020 Dividend Monitor from Link shows a slight improvement, although the numbers still are heavily in the red:

• Total dividends paid in Q3 2020 were 49.1% less than for the corresponding period in 2019. In hard cash terms, investors suffered a reduction of £18bn in their Q3 income.

• Special dividends fell by 90%, from £2.8bn to £299m. If these are excluded – and pre-pandemic special dividends were expected to fall anyway – the decline in regular (underlying) dividends was 45.1%. That is an improvement on Q2 when the drop was 50.2%.

• Banks were once again a major contributor to the fall in regular dividends. Link reckons that they alone accounted for nearly 40% of the drop. It remains unclear whether the Bank of England, which effectively called time on the banks’ dividend payments, will take a more lenient view of payouts for 2021.

• The oil sector contributed 20% to the decline, with BP halving its dividend in Q3 after Royal Dutch Shell had slashed its quarterly dividend by 66% in Q2. Miners accounted for 13%, with FTSE 100 members, Anglo American and BHP, cutting payouts while Glencore suspended them completely.

• Most companies in the sectors which bore the brunt of the lockdown measures – airlines, travel and leisure sector, general retail, media, and housebuilding and consumer goods and services – cut back hard or suspended their dividends. Travel and retail payouts fell 96% year-on-year in Q3, while those from the media and housebuilding and consumer goods and services sectors were down by two thirds. Far from paying out dividends, in Q3 many companies were raising money in whatever way possible.

• Only two sectors, the classically defensive food retailers and basic consumer goods, delivered year-on-year increases, though only just.

• Underlying dividends from the top 100 companies fell by 42.9% in Q3, compared with 45% in Q2. For the more domestically oriented mid-250 the drop was 60.4% against 76% in Q2 (see graph above).

• One unwelcome side effect of the many dividend suspensions and cuts was that the concentration of dividend payments increased from a year ago, although there was a shuffling in names on the list. The top five dividend payers accounted for 33% of total payouts (30% in Q3 2019) while the top 15 provided no less than 68% of the total (56% in Q3 2019).

• Link’s view of future dividends is that:

• The worst is now behind us and Q4 should look a little better than Q3. This view is driven partly by the fact that those companies that wanted to cut have already done so, but it also reflects the likely restarting of dividends. For example, both Land Securities and British Land have said they will restart dividend payments, although neither has detailed the amount of the new payments.

• Rebasing of dividends (i.e. cuts rather than suspensions) is now largely over, setting a new starting point for payments. Thus, there is a clearer picture of likely payouts in Q4 and into 2021, even though uncertainties remain.

• Its central case is now for total dividends to decline by around 45% in 2020 with a similar figure for Q1 2021 (as the look back is to pre-pandemic Q1 2020).

• For 2021 as a whole, its best case for underlying dividends is a 15% rise, while the worst case is a 6% increase.

These figures suggest that the baseline for future dividends may have been established. If so, one of the ironies could be that the UK’s top dividend payer mantle will pass to a company that was long a favourite of Neil Woodford – British American Tobacco.

Source: Link Asset Services October 2020

NS&I provisional results

(AF4, FA7, LP2, RO2)

Last month, National Savings & Investments (NS&I) announced interest rate cuts across the board that wiped as much as 1.75% off existing rates from 24 November.

At the time we commented that, after months of chart-topping rates, it seemed likely that NS&I had reached its full-year funding target in six months. The NS&I’s pandemic-revised Net Financing target for 2020/21 is £35bn (± £5bn). Its provisional Q2 results show it raised a net £23.8bn in the quarter, bringing the total for the half-year to £38.3bn. The corresponding figure for 2019/20 was £4.9bn.

NS&I can expect some hot money withdrawals prompted by its rate cuts. However, its stance on interest rates does not look set to alter: the Q2 results press release talks about the rate reductions delivering ‘better value for the taxpayer by improving the cost-effectiveness of the financing that NS&I raises for the Government’.