Asset allocators have begun shifting some of their high-yield debt allocations to equities in Europe, as data from the region shows that shares now yield more than bonds for the first time on record.
European equities have ticked higher this year as a better political climate brings investors back to the continent. But the ongoing rally in high-yield debt means the average bond now yields 2.8 per cent compared with 2.9 per cent for equities, according to Bank of America Merrill Lynch.
“Credit investors are now receiving the lowest yield ever,” the bank said in a note. “However, equity markets offer more attractive dividend yield, also exhibiting positive convexity on the earnings cycle.”
Gavin Counsell, a multi-asset manager at Aviva Investors, added that spreads on European high-yield bonds have been hovering just 15 basis points higher than their September 2014 record low.
Investors have described European equities’ newfound income supremacy as a “symbolic” development, highlighting a switch in risk/reward considerations within the region.
“There has been a shift in where you want to get your returns,” said JPMorgan Asset Management (JPMAM) global market strategist Nandini Ramakrishnan. “There’s the volatility in equity markets that you won’t see in the high-yield market but people can see through that if returns are high enough.”
“If you go back 12 months many investors’ prospects in economic and political terms were fairly bearish,” added Aberdeen head of economic and thematic research Richard Dunbar. “[Now] we think you are being paid to take equity risk.”
While some, including the JPMAM team, have not entirely turned away from high-yield bonds, they have doubled down on equities as a way of taking risk. Similarly, Mr Counsell said he and colleagues had been reducing an overweight to high yield while becoming more favourable towards stocks.
“We have seen a general uptick in global growth and inflation and confidence. Those elements are making us more comfortable with equity risk because of the growth potential there and the return potential,” he said.
Others have pointed to the threat economic growth represents for fixed income because of the potential for tighter monetary policy.
With the eurozone economy improving and French and Dutch elections having passed without incident, speculation has grown that the European Central Bank (ECB) may look to scale back its quantitative easing programme later this year. The central bank is currently buying E60bn (£47bn) in sovereign and corporate bonds each month.
James de Bunsen, multi-asset manager at Henderson, said: “Given the data now, is the ECB going to announce its own version of tapering? It’s more of a concern than in the US because of the greater impact on the bond market.
“The distortion is greater. We think things are priced to perfection with people saying ‘the central bank is buying assets so my risk is very low’. But there could be proper volatility.”
