Income solutions via equity & credit

- The investment world has a problem: it needs income "European pension funds require a return on assets of roughly 6-8%, safety doesn’t pay much in a backdrop where growth is slower and rates are lower. In the UK pension funds went from 82% in equities in 1990s to 47% today. UK bonds picked up the slack and their weight has quadrupled. But the real yield in the UK and Europe is less than 2%. The solution: corporates are a good home for income - let the battle between Equity and Credit commence."
- An equity strategist’s view: the equity de-rating has gone too far "The real yield gap between government bonds and equities is at a 25-year high (favouring equities). The 12-month forward dividend yield of 4% is above its 30 year average of 3%. Dividends are the performance enhancer in a slow growth environment with range bound markets. We see upside in markets and are not worried about dividend cuts (chart 18)."
- A credit strategist’s view: the equity de-rating could continue "The de-rating of equities will continue given demographic issues and volatility. Credit provides an excellent “middle ground” for income seekers. In particular, BB/B offers income, stability, and upside potential as strategic M&A rise."
- Solutions: in equities, credit and across asset classes "Equities: dividends as a return enhancer for growth & big dividend payers (pg 18). Credit: Risk/Reward opportunities within BB/B bonds (pg 21) Cross Asset Baskets: where we prefer equity to bond and vice-versa (pg 27). Below is our list of a cross-asset preference for equities."

UBS European Equity Strategy 20100917

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