The equity story may become more irresistible if interest rates and inflation rise, a double whammy for bond duration and yield. Additionally, in a recent survey of fund selectors and portfolio managers, Asian and European equities stood out as this year’s preferred asset classes.
Re-evaluating our perception of risk
Bond investors look at the drawdown risk of equities, they focus on the asset not losing value. However, the financial crisis and demographics are changing the concept of risk. With Central Bank zero interest rate policies (ZIRPs) still in place, there may be a need to re-evaluate previous perceptions.
Theoretically, there is more risk in investing in equities because of volatility. But that only holds true if another element is working against you – time. Volatility is only a risk if you are a forced seller.
Consider flipping the question on its head. Would investors think differently if it were they who were losing money, not the asset? Long-term investors may risk losing control of their ability to match their long-term liabilities if their assets lose their purchasing power. Pension and life funds sticking with the dogma that they should be invested primarily in sovereigns in order to play it safe are in effect “losing money”.
ZIRPs and demographics mean such funds may be playing a losing hand. People are living longer and requiring extended drawdown phases, but some underlying assets are barely keeping pace with inflation – and increasingly falling behind.
Longer-term trends on dividend income
Corporates have taken note of the longer-term trend. Dividend payouts are now 60-70% of corporate income in Europe. With American management now increasingly being granted longer-term vesting stocks rather than annual stock options as incentives, US dividends (now at 30-40% of corporate income) could be set to rise. This may be because managers, while they cannot cash in their shares for a long time, can regularly benefit from dividend income that they directly control.
Emerging Market (EM) dividend payout ratios are between those of Europe and the US, yet the pattern is slightly different. Developed market companies like to keep the dividend stable in monetary terms. EM dividend payers like to keep their payout ratios stable. The differing focus makes EM more attractive when the business cycle is positive, and backs developed markets when not. Rising payout ratios and diversity may offer comfort for those investors that may be re-evaluating their options.
Theoretically, a rise in interest rates should trigger great inflows to the equity markets. However, if that does not happen, dividends could offer some cushioning of risks.
Although there are always equity risks involved, the dividend payment is like a parachute. It doesn’t defy gravity, but it possibly allows you to escape injury.
Piergaetano Iaccarino is head of thematic and disciplined equity at Pioneer Investments
Disclaimer: Unless otherwise stated all information and views expressed are those of Pioneer Investments as at 11 February 2015. These views are subject to change at any time based on market and other conditions and there can be no assurances that countries, markets or sectors will perform as expected. Pioneer Investments is a trading name of the Pioneer Global Asset Management S.p.A. group of companies.
