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16 Mar 2022

Eurex

A sharp reversal in dividend expectations?

The start of the dividend season was just the right time for a joint Bloomberg and Eurex webcast on "Dividend Outlook 2022 – Europe's Cash Flood". We took the opportunity to ask Stuart Heath, Executive Director, Equity & Index Product Design at Eurex, about his personal views and outlook for the market in the coming year.

Stuart, can you give us a brief overview of the dividend market situation as you see it?

At the start of 2022, there was a significant focus  on corporate distributions to shareholders. We had already seen the majority of corporate results for the first three quarters of 2021, so we assumed that distributions would generally show a healthy increase. However, the form of that distribution between dividends or share buybacks still created a level of uncertainty that led to an increase in trading and open interest in dividend futures. 

The main focus was on the banking segment, which was also catching up on shareholder returns given the restrictions in place in 2020 and early 2021. Other key dividend yielding segments were also in focus as we seemed to be approaching the end of the pandemic mode, notably energy, autos and telecoms. The key drivers are the underlying fundamentals such as inflation and the potential for more hawkish interest rate policy globally.
 
How do you think open interest will develop and what are the drivers here?

Before the terrible conflagration in Ukraine, I would have seen the focus on single dividend futures and sector index dividend futures, as the implications of dividend distributions for 2021 earnings this year, and the outlook for 2022, were analyzed and disagreed upon. 

Eurex has already seen significant growth in the Euro STOXX® Banks Index Dividend segment, as well as name specific growth in banks, energy, insurance, telecoms and automotive stocks.

Of course, we are now likely to see a sharp reversal in dividend expectations based on world growth, and this will probably drive volumes and open interest towards the liquid benchmark EURO STOXX 50® index dividend products – both futures and, as a downside risk hedge, options too. In fact, options have already gained significant growth in the first two months of 2022. Banks index dividends have also grown to be a reasonably liquid product, so this segment will continue to be in focus, but now with emphasis on downside risk again. 

What do you expect for the remaining three quarters of this year?

The key focus now is the uncertainty and risks that have risen so dramatically following the invasion of Ukraine. So, in the short-term, the focus will likely be on managing exposure and reducing risks until some longer term view can be established across the global financial markets.

I still expect the financial sector to be in focus as it is affected by the sanctions, causing disruptions and losses, as well as the scrutiny on capital and loss-absorbing capacity. The energy sector will also be in focus, but this will probably be more company-specific, based on geopolitical considerations of major assets and revenues. In those sectors such as automotive, where record dividend payouts were anticipated, we may also see some corrections. 

Are there any new dividend products or extensions in the pipeline?

First, Eurex is introducing more single stock dividend futures for the first time in Nordic currencies, allowing specific hedging and more granular trading opportunities in names such as Danske, Swedbank and Telenor. 

We are also working on the introduction of a bank index dividend option, which is a combination of the growth sector and growth products , where we expect to see significant short-term focus  as well as a longer-term development.  

In parallel, the maturity of bank index dividends will be extended from the current five years to seven years, again in response to client demand.  In terms of functionality, we are also looking at the addition of “strips” in the trading system, allowing trades in successive annual contracts to be conducted in one – enabling the expected dividend hedging for longer exposures in a packaged format.
 



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