In an economic environment of subdued growth and low inflation, corporate bonds can offer the security of a steady income stream and capital preservation. Often corporate bonds provide higher returns than cash, government bonds or bank term deposits.
With Australia’s official cash rate position of 2% expected to fall by a quarter of a percentage point in the coming months, corporate bonds look to be worth more in the short term. The theory goes that when interest rates inevitably rise from their current depressed levels, the value of bonds will decrease, although income can offset some of this decline.
Corporate bonds rank higher than shares in the capital structure, so high quality bonds issued in Australia from companies in stable industries are generally safer than equities from the same company. These investments are most effective as a defensive investment strategy when they are managed to minimise the risks associated with interest rate movements.
1. Regular income
Corporate bonds provide a regular income, as the investor receives regular interest payments throughout the investment period, as well as the issue price on the maturity date.
2. Protection from economic weakness
Bonds are considered to be defensive ‘risk-off’ investments that tend to perform well during periods of weak economic growth, primarily via duration and capital structure but can vary due to the credit quality of the underlying issuer.
3. Diversification
In a volatile economic environment, corporate bonds can be a good alternative to shares. The defensive characteristics of bonds can provide an offset to sharemarket weakness. Not all credit or corporate bond funds are the same and consequently, it is important to seek funds that are positioned defensively to minimise the risk of default or loss of principal.
Here we shed some light on what to expect from this asset class in the current environment by providing the near and medium-term outlook for this asset class, as well as credit ratings and our sector and stock selection.
Near-term corporate bond outlook
Medium-term corporate bond outlook
Credit ratings and credit maturity strategy
Sector and stock selection
While the overall outlook for bonds is for low returns, high-quality corporate bonds can continue to provide regular income and diversification within an investment portfolio. Effective management is vital to ensure the defensive benefits of this asset class are reached, and to ensure the right opportunities are taken to invest in the companies and sectors that offer the most attractive yields.
Source: AMP Capital
About the Author
David Carruthers – Head of Credit and Core
David leads the Global Fixed Income team’s credit and core bond portfolio management stream and continues to run macro credit strategy. He was previously Senior Portfolio Manager within Credit Markets, leading the Credit only Portfolio Management stream as well as macro credit strategy.
Important note: While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided.