ING IM predicts a strong year for High Yield

Michel Ho, Senior Client Portfolio Manager, ING Investment Management says: “Companies with strong balance sheets and healthy cash flows can withstand the challenges of low economic growth or even a mild recession. In fact, we expect a double digit return from our Global and European High Yield this year”. Sovereign debt sustainability will remain a key macro driver for corporate credit. Recent improvements have had a positive impact on investor sentiment but there is still a long way to go. Most companies continued to remain cautious and focussed on strengthening their balance sheet and deleveraging.

For 2012 the asset manager states that the asset class will continue to attract new investors as the corporate credit fundamentals remain good and the yields on sovereign bonds with similar maturities is very low. A 5-year German Bund is currently yielding less than 1% whereas the yield on Global and European High Yield is closer to 8%.

Michel Ho continues: “Overall, our economists’ macro economic base case is not negative for corporate bond strategies. Within this base case we expect below potential worldwide economic growth with risk to the downside as a result of austerity measures”. As corporate credit fundamentals are still healthy and defaults estimates are around 2% the current credit spread level of around 700 basis points still offers an attractive return for the risk taken. Particularly at the start of the year, the market had overstated the risks of default with implied default rates in excess of 9.5%.

Looking back over 2011, ING IM observes that, despite volatility towards the end of the year, all High Yield sectors recorded positive returns in USD, with the exception of Housing and Transportation. Amongst the most successful sectors included Energy, Technology and Cable & Satellite, which all recorded returns of more than 9% in USD. Michel Ho concludes: “The last quarter of 2011 saw a volatile but strong total return in the high yield market, especially in October which saw a rush into higher risk asset classes following a very weak Q3. Corporate fundamentals remained strong, with almost a total absence of defaults, while US assets continued to outperform their European counterparts on the back of continued peripheral stress in Europe.

“Despite the sovereign debt fears, we foresee a good – albeit volatile year – for High Yield.”