Modest recovery will offer opportunities
Adam Cordery, manager, Schroder corporate bond fund
I don’t think we are going to see the kind of returns we saw last year but I still think it could be a good year for UK corporate bonds.
We are expecting a modest recovery, modest inflation and modest hikes in interest rates – all of which are ideal for corporate bonds.
The best opportunities this year all lie in the sectors that will benefit most from gradual economic recovery. We are looking at subordinated financials from the banks that we think will survive. Anything like the HSBC and Barclays subordinated financials and even the Lloyds’ subordinated financials might do well.
We like to stick to a theme, so now it is anything that is a cyclical name – Segro, Daily Mail and Lafarge bonds will all do well. In the high-yield sector, we like the Curling bonds, Cemex bonds and we like Wrexham’s bonds also.
Year of the coupon
John Anderson, head of credit, Gartmore
Last year was a once in a lifetime year, just as 2008 was a once-ina-lifetime sell-off, so we are back to where we were at the end of 2007 – it is honours even.
This year will be the year of the coupon. The market will be very firm thanks to low interest rates and people will just collect their coupons and say thank you very much.
We are looking for high yield. If the economic recovery has any legs, which we think it has, rates will stay low so yields of around 7 per cent will still be very attractive. We are going to try to avoid financials and instead go for individual names in the high-yield sector such as ITV and William Hill.
The one area that we are avoiding is still gilts because we think there is no value there. If the fears over sovereign debt blow up again, people will look to see who is next in the pecking order and they may look to the UK but I only see a one in four chance of that happening.
We think 2010 is going to be dull for UK corporate bonds but that is what we want.
Normal ser vice but pull back from defensives
Lewis Aubrey-Johnson, fixed-interest product director, Invesco Perpetual
Unfortunately, we cannot expect anther year like last year, as it was really a one-off that we had never really seen before.
To a large extent, spreads have normalised, making a repeat of last year effectively impossible, so now clients have to be aware that bonds are going to be giving much more bond-like returns in 2010.
We are still attracted to the subordinated financials offered by banks and insurers. There, you are getting spreads that are significantly wider than other sectors and significantly wider than their own history.
You are also exposing yourself to a sector where the fundamentals are slowly improving by investing in them.
Banks are becoming less risky and that is a credit-friendly backdrop for a credit investor.
’If you get it right, it is going to be a very good year for corporate bonds’
There was a lot of activity in financials last year including a few very large capitalraising exercises. We do not think banks will take part in another round of massive capital-raising but you could well see more issuance this year, particularly new forms of issuance such as contingent
Investors need to be considering less exposure to defensive sectors right now. The yields on the defensive part of the market are really not that appealing. Last year, you could have bought a basket of virtually any bonds and you would have done well but this year is not going to be the same. There will be more problems and not everyone is going to survive but if you get it right, it is going to be a very good year for corporate bonds.