Global economy to avoid recession in 2020
Global economic growth is likely to continue slowing in the coming year, but a global recession should be avoided, driving a favourable investment environment for high-yield bonds, according to Neuberger Berman.
The investment manager’s head of intermediary distribution, Matt Thompson, told SMSF Adviser while there was still a moderate risk of economic contraction in the US in 2020, fundamentals in Europe in particular were looking healthy, leading to plenty of investment opportunities for high-yield bond investors.
“In 2020, we continue to see a favourable risk return profile for global high-yield bonds as yield spreads are compensating investors for a relatively benign default environment,” Mr Thompson said.
“While global economic growth is slowing, we see the risk of a US or global recession in 2020 remains low to moderate. We see opportunities in high-yield bonds in European markets where company fundamentals remain strong.”
Mr Thompson said continuing low rates in Australia would drive investors increasingly towards high-yield bonds as an option to boost income in their portfolio.
“Traditionally, Australian investors have not had access to many fixed income product options. While many investors may have invested in term deposits, its returns are linked to interest rates which have been low in recent years,” he said.
“The current low-rate environment means investors are increasingly looking for yield, and as we see more fixed income products enter the market, we expect investors to be increasingly knowledgeable about fixed income and asset classes such as high-yield bonds.”
Mr Thompson said business conditions were a key indicator of the investment outlook for high-yield bonds, which were less tied to interest rates than their investment grade peers.
“Unlike investment grade bonds where returns are linked to interest rates, high-yield bonds are more associated with corporate fundamentals and the ability for corporate issuers to pay their coupons,” he said.
“As such, the main risk associated with the asset class is when a company’s fundamentals are deteriorating and when a corporate issuer defaults.”