315 billion reasons to like high yield bonds?
According to Fidelity International, roughly $215 billion of US debt and €100 billion of European...
The Bank of England today cut its official interest rate for the first time since 2009, down from 0.5% to 0.25%. It also announced an economic stimulus program of up to £170bn, which will comprise government and corporate bond buying (quantitative easing or QE) and funding to help banks lend.
Commenting on the interest rate cut and new stimulus measures, Darius McDermott, managing director of FundCalibre, said: “This comprehensive package is an acceptance of substantial economic uncertainty, and an acknowledgement that, at least over the next two year period, things are going to be very challenging.
“The Bank of England’s monetary policy committee is obviously worried about the possibility of recession and has pretty much thrown the kitchen sink at the problem.”
From an investment point of view, corporate bonds and bond proxies (large, long-established, stable companies) should all do well as a result of the action. Larger UK companies with dollar earnings should also do well, as today’s actions are causing the pound to fall further, making profits earned overseas worth more when converted back into sterling.
In buoying the UK domestic economy, the actions should also be supportive for domestically-focused UK smaller and medium-sized companies. Lower mortgage rates should hopefully encourage people to spend more in other areas of the economy, such as restaurants, retail and other services.
In contrast, most cash savers will now be losing money in real terms. For this reason, even more than ever before, long-term conservative savers may need to consider slightly riskier investments in order to generate returns and keep ahead of inflation.
On the equity front, we like the Elite Rated Evenlode Income and Standard Life Investments Global Equity Income. The Evenlode fund has almost all of its top holdings in companies that get most of their revenue in US dollars. It also focuses on stable stocks with strong dividend yields (and growing dividends), which makes it an appealing option to investors seeking income in a low interest rate world.
The Standard Life Investments fund offers diversified sources of income from companies around the world. UK investors will benefit should the pound fall further as most of the portfolio holdings are denominated in other currencies.
On the bond front, we think the Elite Rated Royal London Corporate Bond and MI TwentyFour Dynamic Bond have the potential to do well in an environment where the Bank of England is buying corporate bonds and thereby pushing up the value of bonds at the higher risk end of the fixed interest scale.