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Developing equity financing in the EU - Financing of the EU economy

Equity 2.0

By Anand Paras - Head of European Equities, Fidelity Investment Management

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The equity culture in Europe has for a long time lagged behind the US. While there are some well- rehearsed reasons for this there are other aspects worth considering if we are to be successful in what I will refer to as “Equity 2.0”.

Before addressing how a more pervasive equity culture can be developed, it is worth reflecting on the progress already made. The adoption of the single currency was accompanied by a harmonisation in accounting standards and, by European companies becoming broader in terms of diversity. Inevitably as the extent of equity financing grew in the corporate sector and the money management industry continued to professionalise, companies began to be run increasingly in the interests of shareholders.
This journey has taken us to what could be described as Equity 1.0.

While the journey from Equity 1.0 to Equity 2.0 appears at this point to be an uphill struggle, I would like to highlight one area which will help. This would be a more active promotion of the long term attraction of dividends.

Historically, European companies have had a mixed attitude to the distribution of their cashflows. However, this has shifted significantly over the last 15 years and the headline yield on the broader European market has now risen to a meaningful level. However, pay-out ratios remain low relative to other markets and the tendency to pay single distributions rather than quarterly distributions, tempers the appeal to savers generally.

In an environment where rates on bank savings and bonds are low in absolute terms, the dividend yield on equity can act as an effective way to draw equity investment into the mainstream of savings. Considered in this way, the asset management industry can play its part by emphasising the material role of dividends and engaging company managements on the choices for capital distribution. Focussing on such income-orientated strategies could bridge the gap that exists between equity and fixed income investors.