UK stocks and high-yield corporate bonds could become more popular this year as investors look for a return amid near-record low government bond yields and turbulent stock markets.
Big swings in stock markets are likely continue throughout the year until question marks over global economic growth and China are resolved, said Stephanie Flanders, chief market strategist for Europe at JP Morgan Asset Management.
Investor optimism is likely to remain subdued, the former BBC economics editor told reporters in London, despite that the risk of a full blown recession in the US and Europe is “reasonably low”.
“On balance, we believe that developed world consumers can carry the recovery forward this year on both sides of the Atlantic. But at this stage in the cycle the expected returns to most traditional forms of investment are relatively low and investors know that policy makers have less room to respond to trouble than they did in 2008," Flanders said.
There will be some bright spots for investors, mostly in developed countries. One will be in high-yield bonds, which is mostly lending to risky companies.
“With US rate hikes likely to be gradual and many sovereign bond yields in the Eurozone still negative, investors remain starved for income,” said Flanders.
“Higher-yielding corporate debt could be an attractive solution, at a time when the yield on many lower-rated bonds has moved up significantly. However, investors need to understand the factors driving yields higher to assess whether they are being adequately compensated for taking risks.”
Investors need to examine company balance sheets to find the companies best able to service their debt as the cycle matures, JP Morgan said.
UK shares will also provide food for thought.
Flanders also said that the relatively poor performance of passive investors who had invested in UK stock market indices could turn a corner this year. Many listed commodity and energy companies have struggled after the collapse in oil and commodity prices. She also said it would be more difficult to beat the market.
“With the oil price lurching down again, the first half of 2016 could be similar to the past few years for the UK equity market, with large parts of the market outperforming the benchmark by a wide margin," she said.
“But sooner or later commodities will turn and it’s going to be more difficult for managers to beat the index. That will be another key point to watch in 2016.”