Prepare for the cult of income

SharesInvestors will soon realise that the growing pool of high-yield corporate bonds is underpriced given the health of corporate balance sheets, according to Stephen Drew, the head of F&C Thames River's global credit team.

This will usher in a new era of credit investing, he says, because these bonds will look increasingly attractive relative to troubled equities.

“I believe the high-yield market in Europe will expand ten times over the next ten to 15 years,” said Drew, speaking at the company's annual conference in London. “We are at the end of the cult of equities and the beginning of the cult of income.”

Drew says the market is overpricing the default risk. The default rate for European high-yield bonds since the 1980s is 21%, yet the market is currently pricing the risk at 45%, according to company slides.

“Corporates have a massive amount of free cashflow,” he said. “Corporates frankly have been hoarding cash. Just take Tesco. Tesco has got so much cash that it's opened a bank on the side.”

©2011 funds europe