In an environment which is more uncertain than in the past, investors are wondering where to find absolute returns in 2016. Schroders experts are clear: in assets such as high yield bonds, or equities. “Given the adjustments that occurred in the credit market, the yields are attractive and we can now get real positive returns, even in an environment of rising interest rates by the Fed,” explains Karl Dasher, Head of Schroders in the US, and Co-Head of the management company’s Fixed Income.
As part of the Annual International Media Conference held recently in London, he said he sees opportunities in the high yield segment, “a very interesting asset in which to be now.” Despite the caution by the energy component in asset, he deems that opportunities may be found in different industries, such as consumer or industrial sectors, and also in the financial sector, with differentials of 6% -7% – avoiding the energy risk, and predicts total returns of between 5% and 10% next year. “The important thing is the selection of securities and investing in a widely diversified manner; we have about 150 names in the portfolio, “he adds.
For Alex Tedder, CIO and Head for and global and US equities, there are always opportunities in equities, despite the uncertain environment in which the market moves. “This year’s returns have been almost flat, disappointing, but in geographical and sectoral terms, there is much divergence”, demonstrating that there are always opportunities. The manager sees a situation with several equilibrating factors: on the positive side, profits, liquidity and its condition as preferred asset and flow capturer; and in the negative side, profit revisions, except in Japan, valuations (most markets, with the exception of Japan are relatively expensive), and geopolitical risk.
But “there are reasons to remain positive: the yields on equities are attractive versus bonds and, if we go back to previous crises, we see that valuations are not so bad,” he adds. In addition, there are always opportunities in those areas where the market is often wrong: the manager mentioned securities which benefit from disruptive technologies, secular growth, innovation, niche players, or those who have purchasing power. For example, those industries which benefit from the growth in online transactions and commerce, such as Tencent, Alibaba, Uber, LinkedIn, Netflix, Google, Trip Advisor, Expedia or Airbnb. “We have no sectoral or country bias: We have no sectoral or country bias: we seek global growth and opportunities and with this viewpoint, the set of opportunities is substantial.
Opportunities in Debt
The bond market has experienced 30 years of gains in fixed income, in a scenario of slowing economic growth, higher saving rate (partly due to demographic reasons) and a lower level of investment than expected, excess savings also in emerging markets, and a fall in public investments. The Bank of England estimates that the overall impact of these factors, among others, explains a fall of 4.5% in real yields.
For Dasher, markets are not looking to the forward looking indicators but at the rearview mirror, and are behaving as if the Fed had already raised rates. “In fixed income markets, many of the fears of a rate hike have already been priced in.” he explains. The proof: Also speaking of credit, the spreads on debt assets are lower than at other times in history. He rules out that the Fed will make a move any time soon: the market has priced it in that it will do so in December, but progress will be very slow, reaching 1.5% -2% within the next 18 months. For its part, the ECB will continue with its QE but will disappoint, while UK rates will rise sometime next year.
In the case of US credit, the expert talks about its dynamics: supply and corporate issues increased, but foreign demand has not been sufficient. However, he sees a trend on the horizon: the appetite of Japanese investors for the asset. “Japanese investors are changing their habits and shifting from investing in domestic assets to international assets, for example, in US debt”; therefore, he explains that issues in corporate debt and the increased supply in this area, can be offset by demand for the asset.
He explained that in emerging debt, adjustments in China will be gradual, and that if the renminbi is not undervalued further, and continues at levels of three years ago, it is because the rest of the world has depreciated more. But he is not worried about the country’s debt levels: “If there is a debt crisis, comparisons with other historical moments would put China in the less severe end of the spectrum,” he adds. In general, he believes that in emerging debt there are interesting opportunities from a viewpoint of selection, of both companies and public debt, building portfolios which are very different from the benchmarks.
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