Looking beyond government bonds
Corporate bonds could be the answer to turmoil in the stock markets and low government bond yields.
Are government bond yields too low and stock markets too unstable? During the crisis, corporate bonds have proved to be an alternative to both government bonds and equities.
A corporate bond differs from a government bond in that it has been issued by a company, not a sovereign state. It is a way for companies to obtain funding, and the yield is higher than for solid government bonds issued by countries such as Germany and Denmark. On the other hand, there is typically a greater risk, as companies may have more difficulty servicing their debts than “highly developed” countries.
“But the crisis in southern Europe has called attention to government bonds and the risks linked to investing in them. Suddenly it is no longer inconceivable that a western European country with high debt, large budget deficits and weak competitiveness, such as Greece, goes bankrupt, so an investment in such government bonds is not risk-free,” says Rikke Secher, Senior Portfolio Advisor, Danske Capital. She is a member of the team that manages corporate bonds for Danske Invest.
Conversely, government bonds from the safer countries such as Germany and the Nordic countries are in so high demand that yields have declined sharply. This makes them less attractive. An investment in a corporate bond typically provides a yield that is around three percentage points higher than the yield on a German government bond.
Danske Invest Global Corporate Bonds Class A
Danske Invest Global Corporate Bonds Class A invests mainly in large European companies, which are currently doing well and are not nearly as squeezed as they were in 2008 during the first financial crisis. Companies have been hesitant to embark on cost-intensive investment projects and have large cash holdings and other liquid assets on their balance sheets. According to Rikke Secher, many of them have sufficient liquidity to repay their loans 2-3 years into the future without the need for further funding.
Attractively priced
Rikke Secher is confident that precisely corporate bonds could be the no. 1 asset class during the crisis, seen from an investor point of view.
A prudent strategy
“When the debt crisis is over, corporate bonds will be strong papers. Prices are very attractive given the companies’ key financial ratios. This applies even though an economic downturn in Europe will also affect companies and their key ratios,” says Rikke Secher.
Nevertheless, the department pursues a prudent investment strategy when it comes to corporate bonds. According to Rikke Secher, she and her colleagues expect a very volatile market with large price fluctuations due to the financial crisis – also for corporate bonds.
“We are very prudent and cautious. When this department enters into new investments, we mainly focus on short-term papers. This means bonds with maturities of up to 3 years, which are more stable in price than the longer maturities,” says Rikke Secher.
However, she is not nervous that a wave of compulsory liquidations will roll across the business sector and put corporate bond investments under pressure.
“Failure rates are currently historically low, and we expect only a moderate increase from the present very low level,” says Rikke Secher. She also emphasises that if one of the companies invested in should fail, loses will not be large, as the department diversifies its investments across many companies, industries and countries.
