High yield bonds attractive in 2016

By Aymeric Forest, head of Multi-Asset Investments Europe, Schroders

Demand for income is still strong
The demand for income remains global and structural, driven by low interest rates and by an ageing global population.
Despite this ongoing demand, the environment has been challenging for income strategies. First, the appreciation of the dollar is impacting liquidity and some interest rate sensitive assets. Second, the normalisation of real rates2 took place as inflation expectations dropped both in the US and Europe.

Real rates are used to assess financial asset
prices – if they increase, growth needs to be strong enough to offset this negative effect.
So what should we expect going forward? Investors will have to adapt to a fast changing environment as valuation may not be a sufficient guarantee of a successful investment strategy.

Regional divergences are more apparent
Global economic cycles are diverging across regions and are expected to continue to do so in 2016. Recent divergences have been mostly driven by exchange rates and central banks’ guidance. As such, we favour regional assets in Europe and Japan, which are both supported by loose monetary policies. Europe is now accelerating thanks to a weaker euro.

Elsewhere, there are some signs of slowdown in the US manufacturing sectors whilst emerging economies remain under the stress of a strong dollar and decelerating Chinese growth. The Federal Reserve (Fed) is expected to raise its key rates.

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