EURO STOXX 50 risk/reward still attractive; Nikkei 225 stalling; S&P 500 LT growth declines
Since our last dividend swap monitor, EURO STOXX 50 2016 dividends have been roughly flat while Nikkei 225 and S&P 500 have been marginally down. Despite the elevated equity volatility, EURO STOXX 50 dividends have been very resilient. We think dividend fundamentals improved in the first half of the year – we still see potential for strong dividend growth from financials and cyclicals while downside appears limited to oil & gas. Nikkei 225 dividends consolidated in line with our more cautious stance since June – we are turning more neutral. S&P 500 LT dividend growth has declined materially since mid-2014, recently disconnecting from forward rates.
Summary of current views and trade ideas
EURO STOXX 50: Our forecasts are roughly unchanged but the upcoming index rebalance is likely to reduce 2016/17 forecast by 1-2 points. We continue to like EURO STOXX 50 2016 dividends, which have been resilient in the despite equity volatility. But upside to 2017+ maturities is more attractive and we would look to roll out the term structure once equity markets stabilise. Until then, we highlight option strategies on dividends as implied volatility remains well below that of equities – we like call spreads and risk reversals.
FTSE 100: Upside risk from a stronger dollar, downside risk from commodities sectors.
S&P 500: LT implied dividend growth has declined further, undershooting forward rates.
Nikkei 225: After the recent consolidation on 2016 we turn more neutral from our previously bearish stance. But we still prefer longer-dated dividends which might benefit from additional BOJ easing.