View more on these topics

Credit where it&#39s due

Credit spreads have held up well amid the turmoil in equities. We see this as growing evidence of a decoupling of credit from equities – with credit outperforming.

Many of the recent “winners” have been lower-quality, more distressed names such as telecom operators. Arguably, therefore, the decoupling has as much to do with fundamentals, namely, the process of corporate balance sheet repair, as it does to technicals.

The environment of modest growth provides the perfect foundation for credit – enough momentum to prevent a fall back into recession but not so much as to divert management attention away from balance-sheet repair and back towards re-leveraging. It would be premature to get too carried away with such a nascent trend but if other company managements follow the responsible lead now being adopted by telecom operators, the credit markets might be forgiven for getting excited.

Typically, over the longer term, returns from corporate bonds rank somewhere between equities and government bonds. Government bonds have been well supported over the last two years, due largely to weak economic data and heightened geopolitical tensions. But with real yields now testing historic lows at sub-2 per cent, further significant strength in government bonds is unlikely.

As for the outlook for equities, forecasts are for anything from a fourth successive year of negative returns to a strong market rally. Somewhere in between is probably most likely. We would not rule out a modest improvement in equities from current levels.

This brings us back to credit. We may have reached the stage in the business cycle where corporate bonds become the asset class of choice.

Certainly the supply and demand technicals are stacking up nicely. In the UK, there is a huge pipeline of demand from institutions and individual investors who are recognising the need to hold a greater proportion of their assets in bonds. The buy case for corporate bonds is beginning to look like a no-brainer.

There are risks. Many corporate bonds are overpriced. This includes those at the upper end of the credit curve that have benefited from a momentous flight to safety over the last 12 months and those lower down trading at distressed levels because they deserve to be.

Investors should identify companies that are demonstrating a willingness to deliver by cutting costs, disposing of assets or restructuring. These will be best equipped to improve margins and their credit profiles.

There are many such examples of these firms among A and BBB-rated companies but credit research and careful stock selection has rarely been more important in a market which is offering potential but which still contains many pitfalls.

Recommended

R&SA outsources closed life admin

Royal & Sun Alliance has signed an outsourcing deal with Unisys to administer its closed life business for an initial period of ten years. The move will see 1,700 employees transfer to Unisys under the deal. R&SA says the arrangement will result in efficiencies and cost savings for policyholders. R&SA will retain responsibility for regulatory […]

Intelligent Finance goes on the offset offensive

Intelligent Finance has sparked a mortgage row by claiming that rivaloffset mortgage products are “poor imitations” of its own.IF&#39s new chief executive Grenville Turner, who replaced founder JimSpowart in January, claims the company&#39s product is superior to otheroffsets because it is the only one which lets borrowers combine theirmortgage, personal loan, credit card, current account […]

Terminal Care

Sorry to go on but I must finish off the theme of what is and whatisn&#39t a redundancy payment. This is important to establish if youwant to claim tax exemptions. Some key points on the question oftaxability under section 148 or the general provisions of Schedule Eare:•Genuine redundancy payments and payments such as thoseconsidered in […]

Out of context

”•Oh to be a Welshman.” – Bankhall&#39s Tony Murrell on the abysmalperformance of the English football team against Australia.•”I&#39m busy avoiding Australians at the moment” – Murrell again.•”You are the most normal person I&#39ve had a conversation withtoday.” – Direct Life & Pensions sales and marketing directorRichard Verdin to an MM reporter after a trip […]

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

    Leave a comment

    Close

    Why register with Money Marketing ?

    Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm

    Email: customerservices@moneymarketing.com