With government bond yields at record lows and a cloudy outlook for equities, high yield bonds and high dividend equities, along with convertible bonds, could be the answer in a low yield environment, according to Dan Morris, Market Strategist at J.P. Morgan Asset Management in his latest outlook.
Forming part of the JPMAM Markets Insights series, "A yen for yield" highlights how government bond yields have reached levels not seen since the depths of the crisis at the end of 2008 - and in some instances have fallen further.
With such low values in the US, UK, Germany and Japan, investors purchasing bonds at this point are much more likely to see negative price returns than positive ones in the near future. So where should investors look?
Dan Morris comments:
"We would suggest high yield bonds and high dividend equities, along with convertible bonds to provide an opportunity to participate in any equity rally that occurs while protecting against the risk of another market correction.
"High yield debt, in particular, is offering attractive spreads in comparison to government bonds. So with corporate balance sheets looking robust, and cash generation strong (in part because companies are currently refraining from investing due to faltering end demand), companies should have little difficulty in meeting debt repayments.
"In contrast, emerging market debt and investment grade debt are less attractively priced, with emerging market debt, which was synonymous with high yield at the beginning of the decade, now trading less than 100bps over investment grade. This may not be enough to compensate for the risks still inherent in emerging markets.
"For those wanting a return from equity portfolios, the reinvestment of dividends will provide the bulk of their return. In an environment where prices are at risk dividend yields become even more important.
"The dividend yield for the entire index (including only those companies that pay a dividend), is 2.9%, so the countries listed in the table offer substantially better rates. We also rank the ten sectors that make up the index by dividend yield for those investors who prefer to look for opportunities irrespective of country."
