Why income investors are turning towards European equities
In the post-Global Financial Crisis world, the relentless hunt for income has pushed bond yields lower. In turn, this has forced investors higher up the risk curve from debt to equities.
In Europe, this market distortion has become extreme; today nearly 90% of European companies pay a dividend yield that is greater than the yield available from European corporate bonds. This is shown by the green line on the chart below.
Meanwhile, the chart also shows a yield differential between equities and corporate bonds in the region of over three percentage points.
As a result, for global investors, generating attractive income in Europe largely means ‘TINA’: there is no alternative (to equities).
However, yield is only part of story; attractive total returns are now also on the cards. For much of this year European equities have traded at suppressed levels, owing to a pessimistic economic outlook. But European financing costs are continuing to drop as a result of quantitative easing (recently restarted by the European Central Bank).
This means European equities are looking increasingly attractive from a valuation perspective, suggesting further potential upside in the near to medium term.