When the smoke clears: tobacco as a long-term dividend play

Over the 15 years to 2015 the MSCI World Tobacco index offered a better return than the MSCI World index in every year bar three. Cumulative performance has likewise been striking. Between December 2000 and December 2015, the cumulative net US dollar return on the MSCI World Tobacco index came in at over 860% versus just 181% for its counterpart.

Just as significant is the dividend yield: 3.91% for the Tobacco Index against 2.6% for the wider index.

In the current low growth, potentially deflationary environment, we believe stable, international businesses with sustainable dividends and steady cash flows are attractive. It is important to take into account the potential for increased regulation around tobacco, as well as broader environmental, social and governance issues relating to the sector, but we believe some tobacco companies will continue to offer those characteristics.

Robert Shelton – Newton, a BNY Mellon company

Over the 15 years to 2015 the MSCI World Tobacco index offered a better return than the MSCI World index in every year bar three. Cumulative performance has likewise been striking. Between December 2000 and December 2015, the cumulative net US dollar return on the MSCI World Tobacco index came in at over 860% versus just 181% for its counterpart. … read more

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2015: which asset class performed best?

Last year proved to be a roller coaster of surprises for many investors, even though the US Federal Reserve did (eventually) manage policy ‘lift-off’ as was widely anticipated 12 months ago.  However, the ongoing rout in commodities, led by a 30%+ decline in energy prices, continued to drag on markets, particularly those with greater commodity exposure.  As a result, headline index movements across the globe disguised divergent trends below the surface, as a narrowing range of countries, sectors and stocks continued to defy the softening market tone.

Somewhat remarkably, despite the persistence of poor media headlines, the Chinese A-Share index managed a 9.3% gain in local currency terms (versus 4.6% in US dollar terms) as government intervention, and a ban on sales of large holdings, calmed investors nerves after the ‘botched’ currency devaluation in August.  A key issue for 2016 is likely to be whether the Fed manages to engineer the gradual ascent of interest rates anticipated or, like Buzz Lightyear in Toy Story, instead of flying on the path to ‘normalisation’, the Fed gets found out to be ‘falling with style’.

Peter Hensman – Newton, a BNY Mellon company

Last year proved to be a roller coaster of surprises for many investors, even though the US Federal Reserve did (eventually) manage policy ‘lift-off’ as was widely anticipated 12 months ago.  However, the ongoing rout in commodities, led by a 30%+ decline in energy prices, continued to drag on markets, particularly those with greater commodity exposure.  As a result, headline … read more

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Which industry is unlikely to see a pay rise in 2016?

Technological innovation (horizontal drilling and hydraulic fracturing), the Organisation of Petroleum Exporting Countries (OPEC) inaction and cost deflation have effectively ended the 12 year up-cycle in oil, resulting in the biggest oil price collapse since the 1980’s. Indeed, nobody saw the US shale oil revolution coming. Between 2009 and 2015 US oil production doubled, approaching all-time highs not seen since the early 1970s and contributing to a supply-demand imbalance in global oil markets. In response OPEC, steered by Saudi Arabia, refused to cut production and actually increased it throughout 2015, effectively removing any floor in the price of oil.

After a significant increase in industry project complexity during the 2000’s, the new oil price reality is forcing companies to make significant cuts to costs. We see significant scope for cost deflation across the supply chain, such as industry wages and rig rates. In 2002 workers at two global oil majors were paid similarly to their counterparts in other engineering industries, but in the decade that followed the salary employees commanded diverged from the rest of the engineering industry. During 2015 this has started to correct, with room for further wage deflation. Another example of cost deflation has been falling day rates for oil rigs. In 2014, the day rate for an ultra-deepwater rig reached US$650,000. Just 12 months later this had fallen over 50% to approximately US$300,000 per day. We believe sector valuations reflect a much higher oil price environment.

Chris Smith – Newton, a BNY Mellon company

Technological innovation (horizontal drilling and hydraulic fracturing), the Organisation of Petroleum Exporting Countries (OPEC) inaction and cost deflation have effectively ended the 12 year up-cycle in oil, resulting in the biggest oil price collapse since the 1980’s. Indeed, nobody saw the US shale oil revolution coming. Between 2009 and 2015 US oil production doubled, approaching all-time highs not seen since … read more

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2016: Key market drivers for the year ahead

For the world’s markets, 2016 looks set to be another challenging and volatile year. In politics, the US election promises to be a headline event but other countries’ voters will also be heading to the polls. In Europe, for example, a potential EU referendum in the UK and the rise of extremist parties could have profound implications for the future of the world’s largest economic block.

On the macro-economic front, world GDP growth looks likely to continue to be driven by diverging and idiosyncratic stories over the medium term.

In the US, key questions will be whether the economy can detach from external affairs – and whether increased consumer spending can translate into significant interest rate rises. Additionally, the strength of the dollar will be an important factor to consider. In Europe, the Central Bank’s policy intentions will remain front and centre, while in emerging markets, a further slowdown in China could have a tremendous impact on resource-based economies across the world. In Latin America, meanwhile, select economies are seeing some nascent signs of stabilisation even as inflation remains worryingly high.

Finally, the commodities story can be expected to remain a crucial factor governing global growth prospects in 2016, with the supply and demand dynamic for basic materials driving fundamentals across broad swathes of the currency, equity and fixed income markets. Will commodity producers have enough currency reserves and the right policy toolkit to survive ‘lower for longer’ commodity prices? And will commodity-consuming countries see a more sustained pick-up in confidence?

These questions, among others, will form a large part of our analysis over the coming year. Click here to access more outlook pieces for 2016.

Jason Lejonvarn – Mellon Capital, A BNY Mellon company

For the world’s markets, 2016 looks set to be another challenging and volatile year. In politics, the US election promises to be a headline event but other countries’ voters will also be heading to the polls. In Europe, for example, a potential EU referendum in the UK and the rise of extremist parties could have profound implications for the future … read more

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