Mark Kiesel, head of corporate-bond investment at Pacific Investment Management Co. (PIMCO), said corporate bonds, particularly specific financial-sector bonds, likely will top Treasuries in 2010. After falling in late 2008, corporate bonds have rallied this year. However, Kiesel cautioned that risks remain.
In a note to investors on Dec. 28, 2009, Kiesel did not recommend any specific companies’ bonds, but pointed out overall financial sector strengths like healthier balance sheets, the increase in loss-absorbing common equity and regulatory efforts to help cushion balance sheets and protect bondholders from asset-quality deterioration.
Kiesel cited the following risks to the financial sector in 2010: a weak economy or double-dip recession that would hurt both residential and commercial real-estate prices, pulling banks’ asset quality down with it; the Federal Reserve opting to raise the benchmark federal-funds rate, which would hurt banks’ profitability; and financial reform regulation and legislation that could hurt banks’ investments or force them to raise more capital, which would lower shareholder returns.
While investment grade bonds should provide decent returns and a safe haven in 2010, investors are still quite interested in high-yield debt, according to a Bloomberg report. Investors are indicating that they prefer high-yield, high-risk debt to investment-grade bonds, prompting corporate borrowers to sell at least $1.36 billion in bonds. “The perception, now that we’re exiting this recession, is the default risk for some of the issuers drops,” said Malcolm Polley, chief investment officer at Stewart Capital Advisors. “People are looking for yield pretty much regardless of what the risk involved is.”
Investors looking for a relatively easy way to allocate assets toward investment grade or high-yield bonds may consider exchange traded funds. Two examples are iShares IBoxx Investment Grade Corporate Bonds (symbol: LQD) and iShares IBoxx High Yield Corporate Bonds (HYG).
Gregg D. Killoren
victoria1014
Investment Assets Flow to Emerging Market Funds – Are They Now Overbought?
A record amount of investment money flowed into emerging market equity funds in 2009. Due to extremely low interest rates, investors seeking significant returns on their money have gravitated toward countries that should provide higher growth rates as the world recovers from the financial crisis and recession.
Emerging equity fund inflows surged to $80.3 billion in 2009, according to research group EPFR Global. That was the highest influx since EPFR started tracking the data in 1997 and compared with $49.5bn of outflows in 2008.
The strategy, so far, has paid off well. The FTSE All-World Emerging Markets Index has risen 75 percent since January 1, 2009, far outpacing the 28 percent gain reaped by the FTSE All-World Developed Index. Analysts said emerging markets were valued at about 20 times their trailing 12-month earnings, compared with about 7.9 times during March lows. The world’s four biggest emerging market economies, Brazil, Russia, India and China (known as the BRIC countries) accounted for the bulk of this year’s investor interest, with about $60 billion of these inflows.
However, with emerging markets trading at relatively high P/E ratios, and the economic recovery in the U.S. facing uncertainty and many challenges, a return to risk aversion in 2010 is not out of the question. Such a change in sentiment will almost surely cause a vast sell-off in risky assets such as emerging markets. Thus, we recommend investors to keep tight stop losses on emerging market funds to protect gains, and we also would not recommend adding to any positions in this area. Rather, for international exposure, we recommend looking toward developed countries that have been beaten down and have not yet attracted significant investment – one example is Japan.
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Posted in Economy, Investing, Market Commentary
Tagged Economy, Emerging Markets, Investing, Japan, Market Commentary