Perhaps it is no great surprise given the surging performance of equity markets (despite the odd blip) so far in 2013 that many might be ignoring corporate bonds. The start of the year was dominated by talk of a “great rotation” among investors from bonds to equities and with the FTSE 100 recently touching a 13-year high, those who made such an asset class shift might be feeling a little smug.
Indeed according to the IMA in February this year the UK Corporate Bond sector was the worst selling in net retail terms, while in the most recent statistics for April it was the fourth worst, after witnessing net outflows of £68m.
Retail investors have perennially had a love/hate relationship when it comes to the corporate bond sector, with the general rule of thumb being they love it when stockmarkets are tanking (it was the best selling IMA sector for the whole of 2009) and vice versa when markets are racing.
So what are those retail investors who are shunning corporate bonds missing out on? This week’s cover story by Rodrigo Amaral looks at the prospects for the asset class both at home and overseas, which despite the pessimistic forecasts conditions seem to continue to favour for the time being.
Amaral notes conditions have been so favourable to borrowers that even companies that in the past avoided increasing their debt, such as Apple, are coming to market. This is because yields have continued to fall and interest for new issues has been sustained, even though more money is being allocated to stocks.
The big fear is that the destiny of the market lies largely on the decisions to be taken by the world’s central banks regarding monetary policy. Amaral notes a change of policy by one or more of the main central banks constitutes the main threat to being invested in the asset class.
In the poetic words of Rathbones’ Bryn Jones, manager of its Strategic Bond fund: “Quantitative easing is like the alcohol in the punch bowl. People are drinking are drinking now from the punch bowl and having a great time. If someone keeps pouring alcohol in, everybody will keep on drinking and enjoying the party. But as soon as there is no more alcohol left, people will start to sober up and could end up with a hangover.”