Rudi's View | May 16 2019
In this week's Weekly Insights (published in two parts):
-All About Dividends
-Royal Commission: Ongoing Impact
-Quote Of The Week
-No Weekly Insights Next Week
-FNArena's Corporate Reporting Monitor
-June Rebalance For ASX200 Index
-Rudi On Tour
-AIA Conference Special
[Non-highlighted parts will appear in Part Two on Friday]
By Rudi Filapek-Vandyck, Editor FNArena
All About Dividends
Ask a share market expert what is the main force behind listed equities and you are more than likely to hear "corporate profits".
In recent years more and more experts have been pointing towards excess liquidity provided by major central banks, or to artificially depressed government bond yields, though both factors are largely intertwined.
Occasionally one might try "economic growth" or "global growth momentum" but that story would be quickly dismissed by dozens of academic papers unable to establish a reliable link between share market performances and economic growth, irrespective of day traders' unwavering focus for what might come out next in terms of economic data and indicators.
In more recent times, for obvious reasons, fingers are pointed towards US President Trump, China and the so-called "Trade Wars".
Other reasons that are occasionally mentioned include monthly PMI surveys, funds flows, corporate share buybacks, earnings revisions, and credit spreads.
Dividends, or more specifically: growth in dividends, is not often referred to.
Yet recent analysis by analysts at Citi suggests global equities move in strong correlation with growth in dividends, making this at least one extra indicator investors might want to pay attention to.
Starting off with Citi's key conclusion: global equities are up around 7% per annum since 2010 simply because global dividends are up by around 7% p.a. since that time.
Moreover, reports Citi, throughout the period since the MSCI AC World Index trailing dividend yield has traded in a narrow 90bp range oscillated around a global average yield of 2.5%, which is where global equities are at right now.
Thus while on a day-by-day basis, equity indices can trade heavily on internal and external factors, including those mentioned earlier, it appears underlying the ultimate direction stems from growth in dividends.
The graph below, courtesy of Citi, suggests the correlation between global equities and dividend growth is quite solid and reliable, even though equities can temporarily move off course in either direction.
For example, the graph clearly suggests the savage sell-off in 2008 was extreme as dividend cuts were nowhere nearly as large, and the same conclusion stands with regards the eurozone crisis in 2011-2012 (also clearly visible). The same can be said of 2015.
On the other hand, the graph also shows equity markets were overvalued in the years running up to late 2007, and the same happened in 2017 and 2018.
The first conclusion to draw is that global equities in 2019 do not seem out of kilter with global dividends that have continued to grow throughout the sell-off in late 2018 and the subsequent V-shaped recovery throughout January-April.