Chart of the week: yielding a dividend
Source: Refinitiv Datastream, Aberdeen Standard Investments (as of 31 August 2019)
Risk warning: Past performance is not a guide to future performance, nor a reliable indicator of future results or performance.
For some time, equities have measured as cheap versus government bonds when comparing yields. Even after the sharp spike in government bond yields in the last week or so, this is still the case.
Equities have also been seen to yield more than corporate bonds in many countries, especially in Europe. The chart shows that almost all large UK and European companies have offered a more generous yield than corporate bonds in their respective countries.
In part this is because the global hunt for yield has encouraged investors to move from (low/negative yielding) government bonds into corporate bonds. This has been further accentuated by the new round of European quantitative easing.
The resulting fall in corporate bond yields has had various side effects, such as opening up the potential for larger companies to issue debt at negative yields. Yet despite this anomaly, we still expect modest positive returns from global investment-grade bonds over the medium and long term. However, there may be an opportunity cost of holding bonds over cash.
Meanwhile, we think equity markets have been discounting worsening economic and geopolitical conditions. However, we do not expect these worst fears to be realised. Hence valuations do not scream expensive and investor positioning remains cautious.
So even in a world where we have seen dividend yields above corporate bond yields, we think that over the medium term, both asset classes can continue to provide positive returns.
RISK WARNINGThe value of investments, and the income from them, can go down as well as up and you may get back less than the amount invested.
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