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UK shares and dividends on the up

25 June 2009 / by Rebecca Sargent
Both UK shares and dividends are on the up, according to industry experts, hinting at the beginnings of a slow but sure recovery, but not necessarily the speedy recovery markets have been speculating about.

Experts at Invesco Perpetual have found that since the UK equity market hit a low point in March this year, the FTSE All Share Index has increased by 26 per cent.

So far, the leaders in this area have been what Invesco Perpetual refer to as 'cyclically sensitive sectors' which include industrial metals, forestry and paper, mining and technology, which have increased by an average of 80 per cent.

Banking, life insurance and general financial stocks have also done well, rising by an average of 60 per cent, while 'defensive sectors' such as pharmaceuticals, telecoms and tobacco have seen an increase of just two per cent in the same period.

However, those shares that have seen such significant rises in value were not a result of the companies' earnings, Neil Woodford, head of investment at Invesco Perpetual said:

"As I scan the valuations of a number of cyclical stocks, it is astonishing where their share price rises have taken their valuations. As there has been no increase in these companies' profitability or earnings, all of the share price appreciation has added valuation premium."

As a result, experts at Invesco Perpetual are backing slow burning defensive stocks, according to Mark Barnett, fund manager of UK Equities at Invesco Perpetual: "Given that absolute, not just relative valuations, for the stocks we prefer are at very low levels, we are confident that we will be able to make positive returns as well as relative gains when the sector rotation away from cyclical occurs."

Meanwhile, experts at investment firm BlackRock believe that company dividends are also set to rise over the next year. Commenting, Nick Mcleod-Clarke, fund manager of BlackRock's UK Income Fund said:

"Savers relying on company dividends as a source of income may feel as if they have suffered a severe 'haircut' recently, as a stream of banks and other household names have cut their payouts. However, although the hair may have been re-styled, savers should take some comfort that it hasn't stopped growing."

In fact, according to Mcleod-Clarke, six out of ten companies in the FTSE 350 have already increased their dividends, and oil companies in particular have raised their dividends substantially, pointing to more increases to come.

"Overall, given a stable pound, we currently expect dividends to rise modestly over the next year. However, dividend growth will be focused, so investors must pay attention to stock and sector selection," Mr Mcleod-Clarke concluded.

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