LONDON (Reuters) - Investors are betting that likely new stimulus measures from the European Central Bank on Thursday will help shore up inflation and provide meatier dividends from euro zone companies for the rest of the decade, derivatives data shows.
Bets on future dividends from euro zone blue-chip companies, as measured by Euro STOXX 50 dividend futures for the next six years, have risen over the past seven weeks as ECB policymakers opened the door to a rate cut and further measures to fuel credit.
Given that payouts tend to rise along with inflation, long-term dividend futures are a way for equity investors to bet on monetary easing while not taking a gamble on market direction.
The ECB is expected to start charging banks for depositing money overnight and to launch a refinancing programme at its June 5 meeting. These two measures are seen by some in markets as paving the way for outright asset purchases, known as quantitative easing (QE).
"This move on the long-term dividend futures is a typical QE trade," said Delphine Leblond-Limpalaer, equity derivatives specialist at Societe Generale.
"QE could happen later this year but...people want to play something happening on June 5."
Futures on dividends to be paid by euro zone blue chips in the three years to 2020 have risen between 2 and 7 percent over the past seven weeks, outperforming shorter-dated maturities, which have gained less.
Shorter-dated dividend futures tend to be driven more by micro-, company-level factors while longer-dated contracts primarily move on macro- factors, especially inflation.
The move reflected investors' speculative bets that monetary easing would eventually help drive up inflation, earnings and dividends.
Despite some selling over the past few days, as worse-than-expected data trickled out of the eurozone, the outlook for dividends remains positive and some strategists saw potential for further gains.
They cited major rallies in Japan's Nikkei and U.S. S&P 500 dividend futures when Bank of Japan and Federal Reserve unveiled QE programmes in late 2012.
"If you get a similar contraction in the risk premium as we saw for the Nikkei or the S&P during QE periods, we would expect an additional rally of longer-term maturities of at least 6-10 percent," Antoine Deix, global head of dividend strategy at BNP Paribas, said.
RISK OF DISAPPOINTMENT
The recent rise in dividend futures also implies a higher risk of a pullback in these contracts if the ECB falls short of market expectations on June 5, strategists warned.
"If they say anything that looks like they're going to delay the QE, that's a risk in the short term," Soc Gen's Leblond-Limpalaer said.
She highlighted a fall in the 2018-2020 contracts since May 28 as evidence some investors had already started to take profit on that trade.
Dividend futures are less liquid than cash equities, meaning they are more susceptible to mispricing, and the impact of a selloff could easily be exacerbated by a scarcity of counterparties to sell to.
"Dividend futures have moved quite a bit ahead of equities and right now the price is rich," said Peng Cheng, global quantitative and derivatives strategist at JP Morgan.
"I expect longer dividend futures to underperform equities if we have a disappointment and we get a correction."
(Additional reporting by Vikram Subhedar; Editing by Lionel Laurent and Peter Graff; Graphic by Francecso Canepa)
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