High yield debt and high dividend equities highlighted in latest market insight report from asset managers

News - Banking

Written by Ray Clancy

Thursday, 09 September 2010 10:10

Investors are being urged to look at high yield debt and high dividend equities for better returns.

High yield bonds and high dividend equities could provide good yields in the current climate, according to J.P. Morgan Asset Management

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, said Dan Morris, market strategist at J.P. Morgan Asset Management in his latest outlook.

Forming part of the JPMAM Markets Insights series, the report ‘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, it suggests.

‘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,’ said Morris.

‘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,’ he explained.

‘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,’ he added.

‘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,’ said Morris.