Are things looking up for UK issuers and investors?

Jordan Anderson - Manager, Capital Markets, Link Group
08 February 2021

We can only hope that 2021 is an improvement on its predecessor. The economy and markets were brought to their knees at the nadir of the pandemic, but we have started to see some progress – albeit slowly – towards recovery. Primary market activity has markedly increased from the last time I wrote the foreword in July last year.

In Q4 2020, we saw nine issuers come to market raising a total of £126m of new money. These were mainly led by SourceBio International Plc, Abingdon Health Plc and Kistos Plc compared to three companies in the same period in 2019 with £118m of new money raised.

The figures above speak to the ambitions of corporates to tap the capital markets, but also highlight investors’ somewhat timid appetite for new companies – citing the three-times amount of new issuers but the new money raised only falling short by £8m.

However, it seems they are more likely to loosen the purse strings for more well-known brands like Doc Martens which was eight-times oversubscribed and Moonpig which priced at the upper bound of their expected range.

Illustrating the scale of pandemic, Link Group’s quarterly Dividend Monitor noted that UK dividends fell 44 per cent to £61.9bn; the lowest total on an annual basis since 2011. Whilst the final quarter of the year was more upbeat than previously expected, income-oriented investors took a huge hit. This was particularly due to the fact that the worst rate of dividend cuts and cancellations came from the financial, mining and oil sectors, who are typically the largest dividend distributors.

Cuts related to COVID-19 began at the turn of Q2 and climbed to £39.5bn by the end of 2020. Between Q2 and Q4, a staggering two thirds of issuers halted or reduced their pay-outs. Over 25 per cent increased them and the remainder maintained their dividend.

Link Group expects 2021 dividend pay-outs to increase by 8.1 per cent on a best-case basis, generating a total of £66bn. Special dividends could help to boost the figure to a headline £68.1bn – a rise of 10 per cent.

But on the other side of the coin, our worst-case scenario points to dividends potentially continuing to drop for 2021 as a whole, falling 0.6 per cent to £60.7bn on an underlying basis or £61.5bn including special dividends.

Robust share prices and slashed dividend forecasts may lead to stagnation of the prospective yield on equities. Based on our best-case scenario for this year, Link Group believes UK equities will see gains of 3.1 per cent or 2.8 per cent if our worst case comes to fruition.

Where does this leave us? We have to continue to monitor how the government reacts to developments of COVID-19, particularly with respect to new strains of the virus.

Many have criticised what seemed to be late, knee-jerk reactions by Boris Johnson. But others recognised the government’s rapid policy response, such as the relaxation of pre-emption guidelines, and extensive investor support throughout the pandemic.

Public favour is sure to increase if the roll out of vaccines is continued in a structured, timely manner and significantly reduces the ever-important R number.