Risk-averse investors might reap returns from the recovery in high yield bonds and energy markets this year, even though China’s slowing growth and its weakening currency extend corrections in global markets, Citicorp Securities Investment Consulting Inc (花旗投顧) said yesterday.
“Despite the precipitous tumble in high yield bond prices, the rate of decline has not deviated from historical averages during previous downturns,” Citicorp Securities vice president Spencer Wang (王進彰) told a media briefing.
“The doubts over energy markets have been amplified by falling oil prices, but investors might still find opportunities in the companies that are less susceptible to risk of default and issue US dollar denominated high-yield bonds,” Wang said.
High-yield bond spreads are standing at 600 basis points with many promising 8 percent in interest earnings, which is rare in the current investment climate, he said.
Wang advised investors to consider weighing in on high-yield bond funds that have a low “CCC” grade composition.
“Wide price swings in high-yield bond funds are offset by interest returns, provided that most composites do not default,” Wang said.
High-yield bond spreads surged to about 2,000 basis points in 2009 and to about 1,000 basis points during 2000’s dotcom bubble, Citicorp data showed.
As for crude oil, Wang said that concerns over the global supply glut are exaggerated, adding that oil imports are still growing in major economies.
He said that Iran’s return to the global export market is not a concern, as the quality of the country’s output remains wanting.
US shale oil rigs lose about half of their production capacity each year as resources are being exhausted at a much faster pace than other extraction methods, Wang said.
As shale oil companies need to continue to expand capacity to keep pace with production decline rates, the reduction in overall output is less evident, he said.
Wang also said that he expects the fluctuations in the yuan to peak this quarter and remain volatile throughout the first half.
However, Wang said he retains a conservative view on Chinese stocks, similar to other emerging markets, as cheap valuations can do little to drive up Chinese stocks when investors cannot see significant growth drivers.
Wang forecast the yuan to continue fluctuating between 3 and 5 percent.
“Rallies in the equities market must be driven by business investments and innovation, and we see China falling short in both categories; investors should not buy into comeback stories,” Wang said.
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