They'd Rather Get Nothing in Bonds Than Buy Europe Stocks

How to Play ‘Brexit’ FX Volatility
  • Estimates for Euro Stoxx 50 dividend yield at 4.3 percent
  • The region's government debt is yielding 0.6 percent

The cash reward for owning European stocks is about seven times larger than for bonds. Investors are ditching the equities anyway.

Even with the Euro Stoxx 50 Index posting its biggest weekly rally since October, managers pulled $4.2 billion from European stock funds in the period ended Feb. 17, the most in more than a year, according to a Bank of America Corp. note citing EPFR Global. The withdrawals are coming even as corporate dividends exceed yields on fixed-income assets by the most ever.

Investors who leaped into stocks during a similar bond-stock valuation gap just four months ago aren’t eager to do it again: an autumn equity rally quickly evaporated come December. A Bank of America fund-manager survey this month showed cash allocations rose to a 14-year high and expectations for global growth are the worst since 2011.

If anything, the valuation discrepancy between stocks and bonds is likely to get wider, said Simon Wiersma of ING Groep NV.

“The gap between bond and dividend yields will continue expanding,” said Wiersma, an investment manager in Amsterdam. “Investors fear economic growth figures. We’re still looking for some confirmations for the economic growth outlook.”

Dividend estimates for sectors like energy and utilities may still be too high for 2016, Wiersma says. Electricite de France SA and Centrica Plclowered their payouts last week, and Germany’s RWE AG suspended its for the first time in at least half a century. Traders are betting on cuts at oil producer Repsol SA, which offers Spain’s highest dividend yield.

With President Mario Draghi signaling in January that more European Central Bank stimulus may be on its way, traders have been flocking to the debt market. The average yield for securities on the Bloomberg Eurozone Sovereign Bond Index fell to about 0.6 percent, and more than $2.2 trillion -- or one-third of the bonds -- offer negative yields. Shorter-maturity debt for nations including Germany, France, Spain and Belgium have touched record, sub-zero levels this month.

At the same time, concerns of a Chinese slowdown and turmoil in the banking industry have sent the Euro Stoxx 50 down 25 percent from its April high through Friday. That’s pushed the dividend yield for members of the gauge to an estimated annual 4.3 percent, up from 3.7 percent at the end of December.

Francois Savary, chief investment officer at Prime Partners in Geneva, says the losses have unearthed plenty of bargains. The Euro Stoxx 50 climbed 2.2 percent on Monday.

“If you believe that we’ll avoid a global recession and that fears about deflation are overdone, there’s a lot of attractively-priced assets out there,” Savary said from Geneva. He’s now looking to buy high-yield corporate bonds before considering equities again. “There’s growing interest in the higher-yielding assets now.”

Still, Guy Fosterat Brewin Dolphin says the dividend cuts we’ve seen so far may be a canary in the coal mine.

“You have to assume the dividend yield is not what you’re going to get over the next 12 months,” said Foster, head of research at Brewin Dolphin in London. “The concerns that people had in January haven’t really gone away.”

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