By Alex Severis, Smart Beta and Smart Sustainability Product Manager
Equities around the globe have bounced back since the March 2020 market downturn, the FTSE 100 recovery has lagged other regions. However, UK equities could have the potential to rally in the coming year—in large part expected to be driven by a favorable dividend yield outlook. Dividend forecasts are key to the derivatives market, and this promising outlook is perhaps why we’re seeing growing interest in dividend futures for UK equities.
A subdued recovery for the FTSE 100
The onset of the pandemic triggered widespread market turmoil, and the FTSE 100 wasn’t spared. But while other regions have since staged strong comebacks, recovery for UK equities has been relatively subdued. As shown, since its March 2020 lows, the FTSE 100 has rebounded just 10%—far below the gains of the FTSE 250 and other regions.
2020: A lacklustre year for FTSE 100 dividends
UK equity dividend yields also took a substantial hit in 2020. As the aftershock of the pandemic roiled markets, the Prudential Regulation Authority urged companies to hold onto their cash. As such, many large UK companies slashed their dividends—particularly those in the Financial and Energy sectors. The FTSE 100 has historically been heavily weighted in these sectors, and as a result saw dividend payouts drop by nearly 50% from 2019 to 2020.
The potential for dividend tailwinds for UK equities
Looking ahead, some argue that the 2020 dividend cuts have fortified some sectors and helped improve banks’ capital positions—setting the stage for a surge in FTSE 100 dividend payouts. As shown, after the dramatic drop in 2020 dividend payouts are on track to increase in 2021.
UK equity dividend yields have also reached attractive levels relative to other regions. They’re currently hovering around 3%—higher than the rest of Europe and the broader developed and emerging markets.
These encouraging trends have some investors believing that a strong UK equity dividend forecast could drive a more robust recovery for the FTSE 100—giving rise to more investor interest in UK equity dividend futures.
Meeting the rising demand for dividend derivatives
This overview draws from a recent webinar where experts from Eurex and FTSE Russell discussed the perspective for UK equities, which also marked a new partnership on FTSE 100 derivatives. Part of the futurization project at Eurex, a leading exchange in dividend derivatives and Total Return Futures (TRF), the partnership taps into the increasing demand from large investors to have listed OTC total return swaps versions.
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