Euro STOXX 50 Dividend WeeklyFor the week ended 11 Dec 2018

·   Click here for this week’s Global Dividend Weekly Monitor

·   As discussed in the 2019 Global Derivatives Outlook, we find dividend volatility to be trading at elevated levels, especially compared with like maturity SX5E implied vol. As Figure 1 shows, the 50 delta implied volatility of DEDZ0/Z1, as a % of like maturity SX5E implied volatility, has risen substantially in 2018. Such behavior runs counter to the pulled-to-realized properties of dividend futures, where volatility is expected to decline as maturity approaches. As such we recommend expressing our direction view and taking advantage of the dislocation in volatility via short vol option structures: Indicatively, selling a DEDZ1 95 put can finance buying a 120 – 130 call spread for a credit of 0.3 (ref 109.0).

Figure 1: DEDZ implied vol as a % of like maturity SX5E implied vol

·   ABI 2020 dividends fell 8.5% week on week and were the worst performer among SX5E members last week, as Moody’s lowered the company’s credit rating to Baa1 from A3. Moody’s said it could lower the credit rating further if the ND/EBITDA ratio remains above 4.5x by the end of 2020 from 5.0x currently (including Moody’s adjustments).

·    BASF cut its 2019 earnings guidance to -15 – 20% from -10%, mainly due to performance of chemicals and China’s auto demand slowdown. The share price fell by 3.8%, and 2020 dividend futures fell by 1.8% on the news.

·   Week-on-week performance: Alongside a sharp decline in equities, dividend curve underperformed on a beta adjusted basis: 19s -1.4pts, 20s -4.1pts, 21s -5.0pts, 22s -5.7pts, vs. SX5E -4.3%. European HY credit indices performed similarly: JPM Euro ‘BB’ -1.0%, ‘B’ -1.4%.

·   Bottom-up IBES: 2019 = 123.6, 2020 = 132.7, 2021 = 139.8. JPM estimates: 2019 = 123.1, 2020 = 131.5, 2021 = 138.3. Latest futures prices: 2019 = 118.6, 2020 = 115.1, 2021 = 108.1.

·   Annualized expected return to IBES for the 19s stands at 404 bps and for the 20s at 704 bps. This compares with the HY credit spreads of 411 bps for BB bonds and 758 bps for the Bs.