Investor confidence continues to tiptoe higher as hopes of a Covid-19 breakthough rise. The FTSE 100 is edging back towards last week’s five-month peaks in Monday business. Many commentators are suggesting that a Santa Rally could be upon us in a much-needed boost for UK share investor sentiment heading into 2021.
Testing data surrounding a number of Covid-19 vaccines has been pretty solid in recent days. AstraZeneca joined the party on Monday by announcing that its own concoction formulated with Oxford University had yielded promising results.
Careful now!
I believe that UK share investors are quite right to be buoyed by the news. But they shouldn’t go overboard concerning Covid-19 vaccine development. There’s still much lab work to be done before any of these formulas can be considered a silver bullet. And, the British economy still faces colossal obstacles that could derail a dividend recovery.
Data from Janus Henderson illustrates how severely dividends from UK shares have continued to fall versus the rest of the world. The outlook for a great many Britain-focussed companies looks less than assured, following fresh economic data released today. The profits pictures and balance sheets of a great many UK shares remain less than encouraging.
The latest IHS Markit/CIPS UK Composite Purchasing Managers’ Index (PMI) came in at 47.2 for November. It’s the worst rating since June and shows the British economy moving back into contraction. Covid-19’s not the only crisis that could batter dividends from UK shares in 2021 either. Severe Brexit disruption when the transition period that ends on 1 January could also deal a heavy blow to short-term shareholder returns.
Getting rich with UK shares
I’m not concerned by the threat of a painful downturn in the British economy, though. For one, the shares portfolio I built inside my Stocks and Shares ISA has a broad global focus. Secondly, I buy UK shares with a view to holding them for the long term. Over a number of years the impact of economic downturns on total shareholder returns tends to be minimised. Those than hold their stocks for a decade or more still tend to enjoy great returns (of at least 8% on average a year, data shows).
Besides, there are plenty of UK shares with high exposure to the domestic economy that should keep paying big dividends. Telecoms operators and utilities providers are great buys in this regard, for example, as our need to remain connected and our requirement for running water and electricity remains constant during economic upturns and downturns.
The same exceptional defensive qualities also makes food retailers, general insurance providers, drugs makers and drinks manufacturers great buys for these tough economic times. But one doesn’t have to go ultra-defensive in these troubled times. Cyclical UK shares like those involved in e-commerce, cloud computing, petcare, and video games manufacturing should also thrive in the near term. I’ve bought shares in logistics specialist Clipper Logistics to ride the online shopping phenomenon, for example. And there are many other high-quality, cyclical UK shares like this that are on my watchlist.
