Stocks can deliver better risk-adjusted returns

Kevin Gardiner, Barclays
Stocks are likely to deliver better risk-adjusted returns than corporate bonds, whether investment grade or high yield, according to a report.

Barclays said in its monthly flagship report titled Wealth and Investment Management research dedicated to providing investment advice and recommendation to investors across the region.

However, it added, spreads are likely to be wide, and the economic outlook benign enough, to offer some support when interest rates and government bond yields do start to rise materially, which currently feels unlikely this side of 2014.

The latest edition of “Compass” reports that markets through the summer have been less volatile than anticipated; however, some visible concerns remain intact. On a multi-year view,

“The summer’s rally has not been without foundation. We have seen further incremental progress in the euro area, and the US economy looks less fragile than many had feared. A setback currently feels overdue, and many possible triggers loom in the weeks ahead. However, we continue to see the global economy and capital markets avoiding disaster with room to spare, and expect the best risk-adjusted strategic returns to come from stocks and corporate securities generally, not government bonds. Strategic preference is therefore placed for corporate securities generally ahead of government bonds,” Kevin Gardiner, Head of Investment Strategy EMEA, for the Wealth and Investment Management division at Barclays, said.

The report also highlights that the need for new infrastructure across Asian countries is quite substantial and going forward governments will play an important role in infrastructure building and step up financial support for infrastructure development. Conditions in these countries are in place to embark on the next wave of infrastructure growth, regardless of their level of development. To take advantage of the potential long-term gains, investors can build exposure to companies that are beneficiaries of this growth. For EMEA-based and risk tolerant investors, the report suggests taking advantage of the infrastructure theme through credit rather than equity. Due to the fast-growing nature of some of these companies, the equity prices are likely to be particularly volatile and influenced by the market and regulatory environment. However, as infrastructure companies are usually able to generate steady cash flow to meet the defined coupon and principle payment schedule, the bond market has been an important funding platform for infrastructure projects to date with issues being well-received by investors.

“We remain tactically positive on high yield credit, as it continues to offer an attractive total return in a low-interest-rate environment. High yield bonds have been one of the best performing asset classes in 2012. Despite their strong performance, we remain overweight on high yield bonds in our tactical asset allocation because they provide a relatively safe income stream in a historically low interest rate environment. We believe that interest rates are likely to remain low for at least the next 12 months. We also expect US high yield bond default rates to remain low and we believe the fundamentals continue to support our overweight to high yield debt in a broader portfolio,” Gardiner added.

“For the purpose of implementation, investors should diversify exposure across asset classes to avoid concentration risk. By following this strategy investors avoid the risk of one counterparty defaulting; if this does happen, the return on other issuers should help to mitigate the loss.”

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