With 2012 and 2013 dividend swaps priced at the 55-65 levels, let's look at some of the main drivers which are pushing dividend swap levels significantly lower than the current stock markets are:
a) Banks are cutting dividends or are in no position to pay dividend post-full or -partial nationalisation by government bailouts.
b) Concerns over macro-economic conditions that might affect many companies' ability to maintain dividend levels at the pre-crisis levels.
c) De-leveraging and unwinding of such trades by hedge funds and proprietary trading desks due to losses from other asset classes and pressure from investor redemptions.
Why it may look attractive:
a) Markets are pricing in zero dividends from the financial sector and construction, auto sectors and almost 30% cut in all other sectors.
b) Implied levels look extremely low compared to historical averages, although there is a risk of a longdrawn/prolonged recession.
c) Potential macroeconomic recovery by 2010
d) Cash dividends may resume to restore investor confidence
Given that the dividend swap levels for are so low in absolute terms, the long term risk reward looks attractive.
Eric Tan, London
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