The case for Europe builds in line with income

Two separate research studies continue to build the investment case for Europe, with one demonstrating the importance of dividends as a stabilising factor for total returns.

The case for Europe builds in line with income


Dividend strategies in times of financial repression from Allianz Global Investors shows the contribution of income to total European equity returns over the past forty years has been 42%, by far and away the highest share of total returns for any global investment region since 1970.

Protective characteristics

The report, authored by Hans-Jörg Naumer and Stefan Scheurer, says: “The return to [global] balance will very likely be accompanied by a phase of financial repression where investors should be faced with a longer period of low or even negative real interest in the developed world.
“Compared with other risk asset classes, the risk/return profile offered by dividend strategies would seem to be much more interesting.”
Naumer and Scheurer add that these strategies combine the benefits of high dividend yields as well as protecting against inflation. As far as European companies are concerned, the gap between dividend yields and those on government and corporate bonds has rarely been so wide.
They describe dividends’ ability to enhance the stability of total returns as “an interesting by-product”. On a five-year rolling basis, dividends have been consistently positive since 1973, through all market conditions (42% of the total annualised return).

A healthy quarter on the cards

The second study was by Asset Allocation Research whose latest asset class analysis shows European small caps as one of the biggest movers. They have seen a steadily rising trend since the end of 2013, with European corporate bonds also going in the same direction.
The way the Asset Allocation Research model works is to identify the asset class “most likely to have a positive return in the next three months” – UK small cap is at number one, European small cap at number two.

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