With political uncertainty high on the agenda, my focus is to find companies that can be resilient across many different macro-economic outcomes.
Resilient inasmuch as whilst the shares may fall out of favour with the stockmarket for a period, the company itself has the management team and business model in place to enable it to deliver consistent profit growth and a rising dividend, regardless of global currency fluctuation, commodity price and interest rate moves.
One encouraging recent development has been the fall in the oil price. This will have given new impetus to consumer demand in most major economies and may be sufficient to boost GDP growth rates. Central banks do not appear to be in a great hurry to raise interest rates as headline inflation is very low or even negative in some economies.
Nevertheless, the US Federal Reserve will see cheaper fuel prices as potentially reflationary for the economy and this, combined with the current strength of the labour market, may prompt them to start tightening monetary policy via an increase in interest rates in the near future.
Against such a background, I will continue to evaluate the holdings in the portfolios I manage against long-term dividend growth prospects, whilst recognising that bond yields may rise.
One challenge I face at present is dividend growth in the large UK firms is set to dip this year. I continue to focus on tobacco shares - whose prodigious and secure cashflow is such that Imperial Tobacco is forecast to grow its dividend at 9.9 per cent for the next three years and BAT by 5.7 per cent. Other major holdings where Bloomberg is notably confident about dividend growth prospects include Legal & General at 14.6 per cent and BT Group at 12 per cent.
The UK general election on 7 May will be a fascinating political event with some constitutionally complex potential outcomes. My job is to assess whether there are likely to be any fundamental implications for the UK stockmarket or parts of it.
The risk from a more interventionist government to profit margins in more regulated sectors such as utilities and telecoms is either priced in or not particularly material. In any event, it is probably futile trying to second guess this result or make changes to portfolios in advance.
History suggests governments of any colour will often ditch more radical ideas when faced with the reality of trying to sustain a reasonable rate of growth in output and employment with sound public finances. The longer term political risk is more associated with a likely EU referendum in 2017 and the effects on sterling and financial markets, should the polls indicate a close call.
As for the immediate outlook, dividend growth in 2015 will need to be justified by underlying earnings growth as the payout ratio cannot keep rising sustainably from current levels. Equally we cannot rely on a significant re-rating of the market as valuations are already on the expensive side of fair value. If that sounds a bit pedestrian, remember this does not preclude significant share price moves within the mix and when it comes to forecasting profit growth, I cannot remember a year without plenty of surprises - pleasant or unpleasant.
Mark Barnett is head of UK equities and portfolio manager at Invesco Perpetual
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