Difficult Markets, But a Time of Plenty for Stock Pickers

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It is that time of year when we traditionally look ahead to the new year and make predictions on the performance of various asset classes, sectors and industries.  We find ourselves in a very different environment compared to this time in 2017, which was a ‘goldilocks’ period for most fixed income sectors. With yields at or close to historic lows, we predicted a very difficult 2018, and it has more than lived up to that expectation. Investors have endured a period of transition, with correlations frequently breaking down and almost all sectors producing a negative return year to date – a very rare occurrence for an asset class that accrues income every day.  

One year on, with yields now significantly higher, can we be more positive in our outlook for 2019?

We’ll be sitting down to debate this shortly – our CEO Mark Holman will reveal the outcome as usual in his “This time next year, Rodney” blog – but the higher yields currently available will certainly help and we thought it would be interesting to highlight a few opportunities the spread widening has thrown up. 

Let’s start with a few short dated, high quality bonds, which are very typical of where our purchases have been focused recently.  Frequent readers will know that we are fans of both Coventry and Nationwide building societies; both have issued perpetual AT1 bonds, with their first call dates in 2019, and for various reasons we are confident that both will be called, not least because both institutions have CET1 ratios above 30. The Coventry AT1, callable in November 2019, is currently offered at a yield of 7%, while Nationwide’s, callable in June next year, is offered at 5.4% – very attractive yields for two of the best and safest financial institutions in the UK and Europe.

There are even some juicy yields on investment grade bonds, such as the Aviva 6.875%, rated A- and also callable in November 2019, which can be picked up at a yield of 4.3%. One of our old favourites, the Barclays 14%, with a June 2019 call, is also still available above 3% and is rated BBB- by Fitch. Looking slightly longer, the rated BBB+ Pension Insurance Corp 6.5% bond (bullet maturity in 2024) is available with a yield just below 5%. The Generali 6.416%, with a February 2022 call and also IG rated, is yielding around 7% in euros, which swapped back to sterling gives holders almost 8.5%.  Obviously with Generali, investors are also buying significant Italian volatility, but it’s a lot of yield for one of the biggest insurers in Europe, with a market cap of €23.4 billion.  

Heading into the high yield space, Jerrold, a UK specialist mortgage company, has a BB rated bond, with a January 2024 maturity, yielding 6.6%, while Around Town, an IG rated German-listed real estate company, has a bond with a January 2023 call yielding 4.8% in euros, or around 6.2% in sterling.

This is just a small selection of the opportunities recent spread widening has thrown up. So while despite the higher yields we expect fixed income markets to continue to be difficult to navigate, for stock pickers there are plenty of options to choose from.

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