The super election year of 2024 lies behind us. In addition to another interest rate hike by the major central banks in the USA and Europe, it brought a potentially landmark election victory for Donald Trump in the US presidential election. What is in store for 2025?
In the Funds check series, the fund managers of selected funds look back on the developments of the past year and give their assessment of what to expect from the stock exchanges in 2025. (Please note: forecasts are no reliable indicator of future performance.)
(c) Photo: Stephan Huger
“The environment for dividend shares will remain favourable in the coming months.”
Alexander Sikora-Sickl, Fund manager ERSTE RESPONSIBLE STOCK DIVIDEND
Fund & Performance
The ERSTE RESPONSIBLE STOCK DIVIDEND is a sustainability equity fund that invests worldwide primarily in shares of selected companies from developed markets. The fund's investment process is based on fundamental business analysis. When selecting stocks, the focus is on companies with high to medium market capitalization, attractive dividend yields and, in the past, relatively low price fluctuations. Investing in stocks of companies, that are pioneers in terms of ecological, social and governance aspects, are crucial for investment decisions (Note: Please note that investments in sustainable investment funds involve risks as well as opportunities).
Note: Please note that an investment in securities entails risks in addition to the opportunities described. Past performance is not a reliable indicator of future performance.
Performance since start of the fund (1.3.2017). The performance is calculated in accordance with the OeKB method. The management fee as well as any performance-related remuneration is already included. The issue premium which might be applicable on purchase and as well as any individual transaction specific costs or ongoing costs that reduce earnings (e.g. account- and deposit fees) have not been taken into account in this presentation.
Commentary by fund manager Alexander Sikora-Sickl
How did the fund perform in 2024?
ERSTE RESPONSIBLE STOCK DIVIDEND recorded a positive performance of 16.8% over the year 2024. The most important driver behind this development was the reversal of the interest rate cycle, which provided significant support for dividend shares last year. (Please note: an investment in securities involves risks as well as opportunities.)
Generally speaking, the dividend factor performs inversely to the development of bond yields. This represented a burden for the dividend portfolio during the past few years, when interest rates were on the rise. This situation was reversed in the reporting period.
What sort of conclusion do you draw from 2024 on the capital markets?
In February and March, favourable inflation figures and the resulting expectations of interest rate cuts over the rest of the year already pushed up prices of high-dividend equities. This trend initially proved unsustainable, which is why dividend shares subsequently lagged behind the growth and quality segments well into the summer. The ECB’s interest rate cut in early summer and the growing evidence of a rate cut by the Federal Reserve finally led to a strong factor rotation on the global equity markets from August onwards, resulting in strong gains for dividend shares. The Fed’s actual cut in Fed funds rates in September further supported this trend.
Also, after years of strong outperformance, growth and quality shares had reached ambitious valuations, while many equities in the dividend segment were still hovering at attractive valuation levels. This further supported the improved performance of equities with high dividend yields in the second half of the year.
At the regional level, US equities made the largest positive performance contribution, followed by Europe and the Asia-Pacific region. Financials, led by bank shares, delivered the largest sector contribution during the reporting period. The telecommunications and pharmaceutical sectors also performed very positively in the portfolio. At the individual company level, Packaging Corp of America and International Paper from the materials sector, as well as the real estate company Public Storage, the biotech company Gilead, and the technology company IBM delivered the highest contributions to the positive performance in 2024. (Please note: the companies mentioned here have been selected as examples and do not constitute an investment recommendation.)
What are your expectations for 2025?
The dividend yield of the portfolio is currently 3.9%, well above the comparable figure for global equities (1.9%). At 42.5%, the return on equity of the shares in the portfolio is higher than in the global peer group (ROE: 38.5%). The estimated price-earnings (P/E) ratio for 2025 is 14.0 for the ERSTE RESPONSIBLE STOCK DIVIDEND fund, which is considerably below the valuation of the broad equity market (P/E ratio of 19.2).
The environment for dividend shares will remain favourable in the coming months. Interest rates are not expected to rise in the USA or the Eurozone in the near future, and the macroeconomic outlook is positive. Both factors should support the dividend factor in the market. (Please note: an investment in securities involves risks as well as opportunities.)
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