After US president Donald Trump said that he was sure Russia and Saudi Arabia would make a deal 'in the next few days' regarding their oil volume war, his words sent the price of Brent soaring from what was a low not seen since 2002.
Given banks are cutting their dividends to maintain their balance sheets and Basel II obligations such as an appropriate common tier one equity ratio, income fund managers are piling into the oil majors beleiving the companies are sitting on enough cash to pay coupons for at least one year. Miners are also on the rise so it looks like commodities is the space yield starved investors need to be.
Dividend indices such as the Euro Stoxx Select Dividend 30 are selling off and also S&P futures, there's been a big flattening of that curve now trading with a 50 handle, it had been above 120 three weeks ago. These indices have caused some major stock volatility, Natixis is down 12 percent and been taken out of the dividend index.
"People are concerned that dividends aren't going to returning this year at all," said Edward Keen, head of EMEA equities sales at Jefferies.
He added that some banks are now pricing in no dividends for 2021. After over a decade of bank bashing in which some of the large incumbent FTSE 100 banks were getting eye watering high fines, it had seemed that the banking sector was back to winning ways, even RBS which couldn't turn a profit for a decade, reintroduced dividends two years ago. The mighty HSBC, considered one of the strongest banks listed in the UK despite not raising its distributions for many years, has been suffering, down another 3.4 percent at time of writing to 397.1p.
Black gold
With banks out of the picture for attaining income, many investors may have been heartened to see the market response to Trump's 'assurances' on a deal between the two feuding oil powers, Russia and Saudi Arabia. However, it doesn't look like the message has reached Riyadh, as the country pushed its supply to its maximum level of 12 million barrels a day at the time of Trump's speech.
President Trump clearly has his own agenda, with low oil prices putting pressure on his country's shale industry. However, we've been here before in 2015 and all the US shale industry did in reaction to Saudi's strong arm tactics was mothball the industry until prices recovered. But with some of the players being highly leveraged, there is a strong likelihood of defaults in the sector.
Paul Jackson, head of asset allocation at Invesco, told Fundeye: "I doubt that oil stocks will be able to fill the gap, especially as their own dividends will be under threat. Dividend cuts are likely to become a theme across the market.
"However, when the UK oil & gas sector dividend yield touched 14 percent a few weeks ago, it seemed like too good an opportunity to miss (that provides a big cushion of safety). If income was scarce before, it is even more so now. So, any yield will be in demand. For the oil stocks, all that is needed is a belief the oil price can stabilise, which I think it can."
With the majority of large dividend payers concentrated in just a handful of FTSE 100 stocks, Fundeye has identified some funds that can be used for income purposes that avoid the concentration risk COVID has exposed. These are Premier Miton's Multi Cap Income Fund and Octopus's Multi Cap Income Fund.
