2013: SEB’s Johan Hagbarth sees low rate environment boost to corporate bond funds

Sweden’s low interest rate environment of about 1% is set to persist for a couple of years more, which means investors are more likely to consider corporate bond funds instead of governement securities or deposits, says Johan Hagbarth, SEB’s investment strategist, Sweden.

The interest rate environment is unlikely to deliver any reasonable return over the period. Deposit accounts should therefore only be seen as a buffer, but for long term savers it has become more imporant than ever to consider what can complement this type of buffer, Hagbarth said.

The market’s general attitude to risk means that fixed income investments that contain a certain level of credit risk have the potential to give a fair return, even if that starts to become slightly less than seen in recent years.

However, the rush to investment grade bonds that has already occurred means opportunities there are limited. It is likely that because fundamentals in companies remain strong, the excess return over government securities will remain, but at a lower level. Hagbarth said that investors should not count on more than 2-3% return from this type of fund going forward.

From his perspective then fudns that invest in lower quality credit are far more interesting – high yield. Again, however, investors should expect a more normal level of return in the coming year. For a fund such as SEB Choice High Yield this means return of about 5-6%, he said, assuming nothing unexpected happens.

Another area of opportunity is in picking funds that invest in shorter duration strategies. But, because lending over a longer period tends to be more profitable, then returns may be slightly lower from this kind of fund. An example is Sky Harbour US Short Duration HY, which Hagbarth said should produce a return of about 4-5% next year.

The best opportunity may be in emerging market debt funds. These have longer duration and a currency advantage over time. Risk is higher with this type of investment, including currency risk against SEK, but investors can count on return of 8-10% from a fund such as ING (L) Renta Fund EMD Local Bond.

Finally, investors might want to consider hedge funds that are active in the fixed income space. However, it is more difficult to predict their development on the basis that they tend to target a reuturn consisting of risk free interest plus 2-4%.


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