Inflation and geopolitical risks cloud the global economic horizon

Central banks around the world have responded to high inflation by instrumenting sharp increases in interest rates. Economic growth is already slowing around the world, to the point that some regions could be in recession Right now. As a result, corporate cash flows will come under pressure from both lower demand levels and higher loan servicing costs, which will limit the scope for dividend growth.

More generally, the post-pandemic recovery went well and distributions returned to their historical trend. On the upside, China’s reopening is expected to boost economic growth once the current wave of COVID-19 infections subside.

And what is more important, dividends are much less volatile than earnings globally, while dividend coverage, i.e. the ratio of a company’s earnings to its payouts, is currently high. Although we have been anticipating, since Janus Henderson, a slowdown in dividend growth from its exceptionally high levels in 2022, dividends will likely continue to rise in 2023, in our view.

Time lags, primarily in Europe, China and parts of Asia, where companies typically only make distributions once a year, mean that any slowdowns in these regions will show up later than in countries, like the United States, where dividends must be distributed. quarterly.

From a sector perspective, energy dividends are unlikely to repeat the strong gains of 2022, while mining sector compensation is expected to continue to decline. Among financials, banks could benefit from higher margins, thanks to the higher interest rate environment, so further dividend growth is certainly possible, subject to careful planning regarding the increase. levels of non-performing loans as economic growth slows.

After dividends rebounded much stronger than expected following the 2020 pandemic, there is more uncertainty about prospects for distribution growth over the coming year. Inflation, the duration of the next rate hikes and geopolitical risks cloud the horizon.

However, exchange rate factors should be less restrictive and may start to reverse in the second half depending on current trends, while extraordinary dividends are more likely to be reduced towards its long-term average instead of continuing to increase. This translates to a forecast of $1.60 trillion for 2023, up 2.3% at the headline rate, which equates to an underlying increase of 3.4%.

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