Our Insights

About personal finance, investments and markets.
August 4, 2014

Spot the odd one out

At its core, successful investing is all about finding cheap assets and avoiding overvalued assets. Where do we see the biggest valuation discrepencies in todays markets? In our view, European corporate bonds are too expensive relative to European equities.

The following chart shows the percentage of European companies that have a higher dividend yield than the corporate bond yield. In the 12 years leading up to the Euro-crisis in 2011, on average only about 10% of companies had a dividend yield in excess of the corporate bond yield. Following the Euro-crisis, we could witness a flight to safety that mainly benefitted fixed income (as can be seen by the money flowing into bonds relativ to equities). Now corporate bond yields are at historic lows. As a result, more than 50% of European equities now exhibit a dividend yield greater than the corporate bond yield.

GS Percentage of EU companies with div yield bigger than bond yields 2

Our conclusions:

  • European corporate bonds are too expensive in our opinion. Investors do not get sufficiently compensated for the default risk and interest rate risk.
  • Although European equities are not cheap anymore after the rally of the last few years, to us they look relatively attractive compared to the corporate bond market. We would be buyers on weakness.

If you would like to know how we can help you to translate your financial goals into a coherent investment strategy, please contact us at info@ipanema-capital.com

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