Replacing equities with short dated high yield | Insight Investment

The determination of global central banks to restrain inflation means monetary policy is likely to remain restrictive for some time.

While short rates may have peaked, doubt remains regarding central banks’ abilities to calm inflation enough to enable the possibility of meaningful rate cuts for quite some time, leading asset allocators to reduce long-term European equity return expectations.

However, we believe the end of ultra-low rates may offer investors alternative sources of growth. In our view, a high yield strategy offers a compelling alternative to equities, allowing investors to lock in elevated yields and benefit from the relative certainty provided by contractual fixed income. Forecasters such as Northern Trust expect the global high yield market to outperform European equities over the next ten years, and we would agree with this view.

Ten-year returns and expected returns of asset classes

Source - Northern Trust Asset Management and Bloomberg from 30 June 2013 to 30 June 2023.

We believe a short-dated high yield strategy can potentially provide a portfolio with sizable and predictable contractual cash flows without the volatility that we believe equity markets may face in 2024 and 2025.