HIGH quality bonds offer a reliable income and low volatility of returns – two important attributes for investors. But they are also priced expensively in this uncertain economic environment.
I do not believe gilts are in a bubble. We are still in the grip of a global economic crisis. Weak growth and falling inflation has prompted the Bank of England to extend quantitative easing (QE), and I think it will do so again. We may be several years away from a rising base rate, keeping yields low. There may be tail-risks that are not priced-in. There could also be an inflation problem in the long-term and I worry about the UK’s “safe haven” status, given the poor state of public finances.
There is value to be found in investment-grade corporate bonds. The average yield spread above gilts is still above long-term averages and the technical backdrop is also positive – with negative net issuance reducing supply, and QE fuelling demand. However, they are not without risk – companies are in good shape, but there are signs that the poor growth environment is starting to take its toll on credit quality. Fortunately, investors are well compensated for this at present.
Ian Spreadbury is portfolio manager of the Fidelity’s Strategic Bond Fund.
I DO not think it is even necessary to make comparisons with other asset classes to paint equities in a good light; they look attractive in their own right. The starting point is valuations. You can buy household name companies, such as Electrolux and Vodafone, for less than 15 times earnings, with dividend yields of 4 per cent and more.
What is more, these dividends are well covered by earnings. Many companies have successfully repaired their balance sheets and earnings have risen, but they have not increased their dividend distributions as quickly. This has created a valuable cushion so these companies should be able to maintain or increase dividends even if the economy were to deteriorate.
In fact, the growth in dividends makes equities a standout asset class. In Europe, two-thirds of companies have increased dividend payments in the year to 30 September 2012. In the US, so far, 254 out of the 500 companies that make up the S&P 500 index have increased their dividend pay out this year, while only a mere seven companies have reduced their dividend pay out. We think this positive trend is set to continue.
Ben Lofthouse is co-manager of the Henderson’s Global Equity Income Fund.