The financial sector has been regulated and fined into submission following the crisis, but the equity research team at Credit Suisse had a rebellious thought this weekend. In a piece extolling the virtues of dividend stocks, they postulate the following development:
As bond yields fall to zero, duration matching for pension funds and insurance companies becomes nearly impossible and, consequently, we believe there will be significant pressure on regulators to allow higher equity weightings. On the global equity strategy team, we see a scenario where pension funds and insurance companies are allowed to hold a bigger share of their assets in high quality equities if bond yields remain around zero for a prolonged period. The definition of quality, in our view, is likely to be a high credit rating and a history of no dividend cuts.
It is interesting here to consider the craziness in benchmark fixed income securities, which has spread to non-financial corporate debt already in a visible bubble. If the equity geeks at CS are right, a change in regulation to help pension and insurance funds match duraction in a permanent ZIRP could then extend the bubble in yield into dividend equities. Some will argue that this is already happening, but if real money managers got the go-ahead to match duration using high quality dividend payers, expect the recent insanity of fixed income pricing to move into equities too. Regulators have been on a mission to stabilise the financial system since the near collapse in 2008 and 2009, but the discussion above indicates a dangerous dose of mission creep. We can't wait!
The time has come, we fear, to get rid of the punt in Eurozone banks. We may initiate it later on, but for the moment we prefer to accept defeat. We remain confident that the position in BP will continue to perform as inflation takes over from deflation to drive global asset markets, and we are also starting to nibble at selected down-beaten emerging markets. We have also, however, upped our cash allocation and intend to keep it that way.