The Brexit blues

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The news is full of Brexit news this week with various parliamentary votes happening. There is much concern about whether we leave or postpone or remain, and whether we have a deal or not. I don’t want to get into all that but I do want to consider the investment situation. There are many global issues of concern but Brexit is more particular to Britain and seems to be depressing UK share prices.

According to a Citywire commentator “the UK stock market, which has relatively little connection with the domestic economy is cheap, dirt cheap, trading at a 30 per cent discount to global stock markets and yielding comparatively more than government bonds than at any time in the past 100 years.” According to Investors Chronicle magazine this week the FTSE All Share index has an average dividend yield of 4.27% which is higher than most other markets excepting Australia and Russia.

My way of considering value for money in investment is to look at the dividend yield of investment trusts I would consider owning (or do own). As of yesterday, City of London (CTY) and Edinburgh Investment (EDIN), the two largest investment trusts in the UK equity income sector were yielding 4.4% and 4.3%. By comparison in the global equity income sector Scottish American (SCAM), Henderson International Income (HINT), and Securities Trust of Scotland (STS) were yielding 3.1%, 3.5% and 3.6%. (Murray International (MYI) yields 4.4% but has more of a bias to Asia Pacific, Latin American and emerging market equities.)

My thinking is that the UK is cheaper than global equities from this brief sample with an average 4.35% yield versus an average 3.40% yield. £1 of income is 22% cheaper on these figures. Also, many of the UK registered companies held by these trusts will have global interests and these trusts also hold a small percentage of their assets in non-UK shares.

Looking at the recent history of City of London and Edinburgh Investment from their annual accounts they have only had significantly higher yields at year-end, i.e. above 5%, in June 2009 and June 2010 (CTY), and in March 2009, March 2010, and March 2011 (EDIN), in the aftermath of the financial crisis of late 2008. Those who bought CTY and EDIN ten years ago have enjoyed, I estimate, around 12% to 13% per annum compound growth.

On a simple analysis, I regard any opportunity to buy City of London (CTY) on a yield above 4% should be considered. Given its’ over fifty-year record of yearly dividend increases it suggests you can maybe lock in a safe withdrawal rate of 4% from these dividends.

In conclusion if one can ignore the political and macro-economic background these shares do look cheap to me and are worth considering for purchase. You may think they will get cheaper still, but as ever do your own research.

7 Replies to “The Brexit blues”

  1. Interesting article. I decided a while back to stick to index funds as I am a poor stock picker. I am never sure whether I am effectively stock picking if I choose a UK index fund over a Global index fund.

    The thing that does concern me over Brexit is Sterling. In 2016 my £s portfolio went up as Sterling went down. I doubt I was actually any wealthier from it. If we do “crash” out then Sterling may fall even further. Currently I own quite a lot of Sterling due to knocking on the door of 55 and our ridiculous pension rules – especially the tax free lump sum and and the lifetime allowance tax. Tricky times!

  2. Thanks for commenting. Tricky times indeed, but those UK shares still look cheap to me, and those UK companies with global interests will gain some benefit from a fall in sterling.

  3. Since my original post the yields on EDIN, CTY, SCAM, HINT and STS have moved such that I now calculate that buying £1 of income is now 31% cheaper in the UK than it is globally.

  4. I looked again at the dividend yield of selected income investment trusts. These show an average yield of 4.55% for UK trusts (EDIN, CTY), 3.07% for global trusts (HINT, STS, SCAM), and 2.8% for a US trust (NAIT). I calculate that buying £1 of income is now 32% cheaper in the UK than it is globally, and 38% cheaper in the UK than in the US. UK shares may get relatively even cheaper in the short term, but they look worth considering for purchase if you are seeking long term income.

  5. As at 9 August 2019, I calculate that buying £1 of income is 35% cheaper in the UK than it is globally, and 41% cheaper in the UK than in the US.
    This is based on the dividend yield of selected income investment trusts. These show an average yield of 4.9% for UK trusts (EDIN, CTY), 3.17% for global trusts (HINT, STS, SCAM), and 2.9% for a US trust (NAIT).

  6. Falling knife or opportunity though, that is the question? Been after EDIN for years, and on a 9% discount, I took the plunge. But the market’s high, recession looms, etc etc…

  7. Thanks for commenting. EDIN has certainly got worse recently and is now on a 15% discount and providing a 5.2% dividend yield. It’s suffering the Woodford (now Barnett) blues as well as the Brexit blues.
    Right now the UK equity income investment trust sector seems a good place to (probably) lock in a 4%+ dividend yield and cover the safe withdrawal rate, if you can ignore the volatility of your capital, and hope for mean reversion, but DYOR.

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