Investors looking for yield face a challenge in the current market environment. With many of the world’s major central banks engaging in quantitative easing, sovereign debt yields are at or near historic lows. That drives fixed income investors to look at bonds with lower credit ratings, specifically non-investment grade bonds, or more appropriately, high yield. That demand is being met by new supply. In fact, March saw U.S. high yield volume reach US$34.9 billion. That’s the highest monthly output since October of last year. However, high yield isn’t an asset class where an investor should just wade in and buy up whatever supply hits the street. Investing in high yield requires rigorous research, and as the head of Principal Global Fixed Income’s high yield research, I’ve found that it’s useful to keep in mind ten concepts that help summarize the many factors and variables that interact to make high yield unique and challenging. Here are the first five:
- Cash Flow – Cash flow is important to everyone, but it’s critical in high yield investing. We look at cash flow as the life blood of a company. It is what is left after a company sells its products and pays the costs to produce and sell those goods. Read more
During a recent visit to the United States, the message of Japan’s prime minister Shinzo Abe to President Obama was “Japan is back!” This is Abe’s economic battle cry in his fight to end two decades of deflation, meager growth, and economic malaise. And much like Japan’s feudal lords of a bygone era, Shinzo Abe has a trusted advisor ready to lead his country into battle – a samurai, if you will. Shinzo’s samurai, to coin a phrase, is his appointee for the governor or the Bank of Japan, Haruhiko Kuroda.
Governor Kuroda’s first foray will be during this week’s policy meetings of the Bank of Japan. This week’s meetings, Kuroda’s first, will be his initial test to see if he can achieve the results that eluded his predecessor, Masaaki Shirakawa. Kuroda has assumed his own battle cry of sorts, adopting language from the European Central Bank’s Mario Draghi. “Whatever it takes!” That’s what Kuroda says he’ll do to reach a 2% inflation target within two years – a goal imposed by Abe on the central bank. Read more
There have been many classic debates in popular culture over the years. In technology we’ve had PCs versus Mac, and then Droid versus iPhone. In beverages, we’ve had Coke versus Pepsi, while in entertainment we’ve suffered through Team Edward versus Team Jacob. And baseball will always have the Red Sox versus the Yankees. Even in investments, we have had our own ongoing version of a great debate, which has been simmering for a few years, yet this one involves asset allocation and is much more meaningful and significant: will there be a “great rotation” out of corporate bonds into equities? Read more
The recent all-time highs for several U.S. equity indices are evidence that markets have finally managed to put the dreary politics of the last couple of years in the rear-view mirror and renew focus on the fundamental strengths of U.S. businesses. Hopefully the upcoming debate over the debt ceiling and the federal budget won’t overshadow an economy that’s increasingly building momentum.
The U.S. has several very positive factors fueling its economic recovery. Manufacturing is expanding, driven by relatively low energy costs, improved productivity, and innovation. Some firms, like tech giant Apple have announced that they’ll be expanding their on-shore manufacturing presence – somewhat reversing decades of outsourcing that pushed jobs to low-wage countries. The housing market, a bellwether of previous recoveries, is clearing in many areas of the country. Read more
According to GQ, the hottest haircut trends for 2013 are things like the slick comb over, the short crop, the medium and messy, and the long and parted. Cyprus and Greece have been going a different path; pioneering haircuts that have investors around the world feeling jittery. And by “haircut,” I mean “writedown,” or “loss.” On Saturday, the tiny island nation of Cyprus announced it would raise about €5.8 billion by taxing bank deposits – including individual deposits with only small account balances. This proposal is a means of easing the pain of a bailout agreement. The announcement, which hasn’t stated specific thresholds or percentages, sent a shudder of panic through Cypriots and the wider investment community. Originally, the plan called for a 6.75% tax on amounts less than €100,000, and 9.9% on amounts over €100,000. That means if you had €1,000 in your bank account, after the tax, you’d miraculously lose €67.50. The problem with all of this for investors is not the scope for financial contagion to other periphery markets; the Cypriot economy is relatively small – somewhere around US$25 billion, according to the IMF. No, what has investors spooked is the implication of the bank-deposit haircut. Read more
As the clock ticked past 11:59 and Friday, March 1 turned into Saturday, March 2, the much-discussed sequestration went into effect. Did markets shudder at this lack of a last-minute deal? Not really – in fact, all three major U.S. markets (DJIA, S&P 500, and NASDAQ) closed up on Friday. So, how much of an impact will this roughly US$1 trillion in cuts have on the economy? Not as much as you might think. Read more
On 15th February, the price of gold hit a six-month low of $1,608 per troy ounce, calling into question the precious metal’s credential as an all-weather asset class.
Contrary to widespread perception, gold has not been inflation proof. But it has been a good hedge in periods of market turmoil, when investors have been forced to flee to safe-haven assets.
As recently as last December, many institutional investors, as well as high net worth individuals, had gold allocations as high as 15% percent – 20% in India. Even after the recent rally in the equity markets, many wealth advisors still continue to favour ‘return of capital’ over ‘return on capital.’ Their rationale has more to do with the worries about the other asset classes and less to do with gold’s intrinsic merit. For gold to succeed, evidently, it is enough for other asset classes to fail. Gold does not have to succeed in its own right. Read more