Don't end search for yield just yet

In anticipation of a stronger pick-up in the global economy this year, stock markets around the world have been soaring to new heights.

The Straits Times Index hit a five-year high last week, with the total value of companies in the index surging past $1 trillion for the first time ever.

Around the region, Japan's Nikkei is at its highest in five years, the Thai index hit a 19-year record, and the Jakarta Composite Index touched an all-time high.

United States markets are equally exuberant.

The Dow Jones index of blue-chip companies climbed above 15,000 for the first time earlier this month, while the Standard & Poor's 500 has continued to set fresh records.

With equities performing well and market sentiment strengthening, investors may be tempted to shift funds away from yield-focused assets, which are typically defensive positions.

But that may not be advisable, say investment advisers.

They point out that investments which produce a steady stream of income flows are still relevant today, as the global economic rebound broadens but remains fragile.

"This is still a year of transition - it is not, in my opinion, an environment where investors should be too gung-ho about the investment environment," said Mr Alexis Calla, global head of investment and advisory at Standard Chartered Bank.

He believes that the world economy will not recover "in a straight line" and may suffer some weakness in the near term.

Indeed, growth in the first quarter of this year came in lower than expected in the US and Europe, as well as in Asian economies such as China, Indonesia, South Korea and Taiwan.

While tail risks - unexpected events that could destabilise the global economy - are "receding", they have not yet fully disappeared, Mr Calla added.

"Therefore, I believe investors will still take some comfort from investing in assets that generate significant cash flows," he said.

Mr Albert Tse, head of intermediary distribution for South-east Asia at asset management company Schroders, also believes retail investors will continue to demand income-generating investments.

These "provide a stable source of returns and tend to provide a defence against difficult market conditions", he said.

The prospect of rising interest rates has also become more of a focus in the fixed income markets, said Mr Eric Takaha, director of corporate and high-yield credit at Franklin Templeton Fixed Income Group.

Given this environment, investments such as high-yield corporate bonds and leveraged loans - which are less sensitive to interest rate changes - hold additional appeal, Mr Takaha added.

But investment advisers also said that the search for yield today needs to be more diversified across a greater variety of asset classes.

"We believe that a strategy which seeks income from a wide range of different asset classes in any country or sector, including global equities, investment-grade bonds, high-yield bonds and emerging market debt, can allow investors to enjoy reliable and sustainable income with better upside potential," said Mr Tse.

Last year's top yield plays - high-yield bonds and high dividend equities - may not be as fruitful this year, added Mr Calla.

High-yield US-dollar bonds generated returns of just under 20 per cent last year but are more likely to offer under 6 per cent this year at most, he explained.

Meanwhile, stocks with high dividend yields jumped in price last year, leading to a decline in dividend yields.

In Singapore, for example, real estate investment trusts surged about 30 per cent last year, said Mr Calla.

Both asset classes are still worth looking at this year, but with lower expected yields. High-yield bonds offered yields of 5.6 per cent as of last month, while high dividend equities offered 4.3 per cent, he added.

Other investments to consider are US convertible debt that can be converted into equity, and Asian government bonds denominated in local currencies.

For the latter, yields are above both US bonds and domestic inflation, and overall returns may be even higher if Asian currencies appreciate.

"As always, it is important for investors to understand the risks they are taking with such investment strategies and the benefits of taking a blended approach," Mr Calla concluded.

fiochan@sph.com.sg

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