He says: “In the event of a stronger than expected and evenly distributed economic recovery over the coming months and years, returns for most stocks should naturally be expected to outpace the equivalent credits from here.
"However, if the recovery proves weak and fitful, as many expect, then credit may well deliver better risk-adjusted returns from current levels with less downside risk. We see a lot more bad news having been ‘priced in’ to credit markets already which creates this more asymmetric return profile.
Implied defaults in credit markets are very high at present. Even with conservative recovery assumptions, realised defaults over the next five years would have to exceed the worst cumulative default periods in history before investors lost money across most ratings bands, anything less could result in good returns from here.
"This margin of safety seems to be greatest within higher quality, investment grade bonds at present.”
James Vokins, who runs the Aviva Strategic Bond fund, says a feature of the corporate bond market in the years to come is likely to be that the gap between the better investments and the worse investments will be particularly broad.
He said he does not expect sectors such as commercial property to recover, and so to remain as poor investments in the future.
Peter Doherty, head of fixed income at Sanlam Investments said central bank bond buying programmes and this is making it harder to find good quality assets.
His approach has been to try to buy bonds that central banks are not buying.
Matthew Cady, investment strategist at Brooks Macdonald says the government initiatives to buy investment grade bonds is enough to make him more keen on the asset class, especially relative to high yield bonds.
He says: “US and other governments have provided substantial fiscal support, such as wage subsidy support in the case of the UK, with the UK government paying the wages of workers for the first time.
"With this level of policy accommodation, the outlook for corporate bonds is more balanced, and we recently raised our outlook for UK and international corporate debt from negative to neutral.
"We would however continue to distinguish between investment grade corporate bonds, which we now favour over government debt within a UK context, and speculative ‘high-yield’ grade debt where we would continue to be more cautious.”
Andres Sanchez Balcazar, head of global bonds at Pictet Asset Management says he prefers to own US corporate bonds in the current climate, instead of those issued in the Eurozone.
This is because, he says, the European Central Bank has been buying investment grade corporate bonds for many years, and so bond prices are already relatively higher there.
