Complaints about the poor weather and extra June bank holiday are hardly likely to garner much sympathy, while calls for greater government spending – echoed by the IMF last week – will be amped up further.
As Trevor Greetham, director of asset allocation at Fidelity Worldwide, puts it: “Consumers are unwilling or unable to borrow and corporates refuse to invest. In these circumstances it is up to the government to boost its own spending plans.
“Borrowing your way out of recession isn’t as mad as it sounds. With ten year gilt yields at a record low 1.5%, the markets are sending a clear signal that there is substantially more headroom for counter-cyclical fiscal stimulus.”
Taking on risk
Talk of a shift from austerity to growth, across the developed world, has preoccupied commentators in recent weeks, while there are signs that investors are already thinking about taking on more risk, especially those that rely on income, which seemingly is not being delivered from bond markets.
While corporate bond funds have clearly been the bestsellers so far this year, there remains plenty of interest in the income generating potential of ‘riskier’ asset classes, such as high yield bonds.
However, for Craig Veysey, head of fixed income at Principal Investment Management, there remains an expectation that economic growth will struggle for a while to come, while the Bank of England and other central banks are likely to be forced into further quantitative easing. This, inevitably, will bring more pressure on the health of businesses.
Liquidity risks
“If income investors want to sleep well at night, they should remember that high yield is high yield for a reason and there are significant risks attached,” he warns.
“Although I feel more comfortable with the supportive environment of the higher-quality end of the corporate bond market, I don’t feel quite so comfortable with high yield area and when you start getting into BB and C investment grade quality where there is a lot less liquidity. Investors cannot sell out so quickly and this would concern me in an environment of a protracted slowdown, which is an obvious danger in the next 12 -18 months.”
The fact that Moody’s has this week changed its outlook for Germany’s AAA credit rating to negative proves that no economy is immune from harmful shocks. Investors haven’t forgotten that, but more patience might be required before any real growth returns to both markets and economies.
I’ll be looking at sources of income, beyond equities, in the August issue of Portfolio Adviser, out soon.
