U.K. Earnings Could Halve This Year Due to Covid-19, Citi Says

(Bloomberg) --

Profits and dividends at Britain’s publicly traded companies are set to halve this year due to the Covid-19 outbreak, Citigroup Inc. predicts.

The bank warned clients that the pandemic’s economic impact will be greater in the U.K. due to the country’s dependency on its services industry, which is deeply affected by social distancing efforts.

While consensus is for a 20% decline in earnings, “we think that this is not low enough,” strategists including Robert Buckland wrote in a note. Citi expects U.K. gross domestic product to drop 7.6% this year versus a 2.3% decline globally.

British stocks have underperformed their European peers in the recent rebound. The FTSE 350 Index has risen about 6.5% over the past month versus a 12% gain for the Stoxx Europe 600 benchmark. The gauges remain 26% and 21% lower for the year, respectively.

Payouts too are under pressure, and for pension funds heavily invested in income strategies, the blow is likely to be particularly harsh. U.K. companies distributed $106 billion in dividends last year, according to Janus Henderson.

Investors should favor less-risky, or defensive sectors, such as telecoms, food and beverage, pharma and utilities, Citi says. Cyclical industries such as banking and energy look expensive amid likely “major” cuts to dividends, although oil shares could be supported by a rebound in crude prices later this year, the strategists write.

Britain, which has the fifth-highest death toll worldwide, is expected to extend a nationwide lockdown later on Thursday. Having faced criticism for not implementing containment measures quickly enough, the government is now under increasing pressure to explain its exit strategy.

©2020 Bloomberg L.P.