Investment income provides many benefits – including guarding against inflation and geopolitical crisis – but today’s “safe” bonds may offer no or ultra-low returns. Many of these risks will ebb and flow over time, and they are often binary: they either happen or they don’t happen. As a result, they can be difficult to hedge or invest around.
A less discussed danger is that these concerns could prevent investors from pursuing their long-term goals or deter them from taking sufficient risk in their portfolios. On the contrary, investors who “hunt for income” using riskier asset classes may be able to fight off inflation, stabilise returns and reduce overall portfolio volatility.
An active approach to income investing can help investors search for opportunities and manage a broad range of risks.
Hunt for Income
Neil Dwane, Global Strategist, talks about what is "hunt for income".
Even small amounts of inﬂation can signiﬁcantly erode purchasing power over time.
An annual 2% inﬂation rate can reduce the value of an asset by nearly
in just 10 years1
in just 10 years1
Some living costs even far beyond inﬂation
In many parts of the world, health-care expenses, education costs and real estate are climbing faster than the oﬃcial 2% inﬂation target of most major central banks.1
Global home price appreciated by
in just 5 years2
in just 5 years2
Home prices in HK are even
more than triple since 20092
Stock prices more volatile in late cycle and not easy for investors to ﬁght inﬂations
Stock markets have suffered wild swings as reﬂected by vix. Higher volatility and dispersion of investment outcomes could be expected in late cycle. 2018 was the ﬁrst year posted negative returns across major stock markets since 20083.
Tangible income streams could combat inﬂations and help navigate high uncertainty such as Tech Bubble in 2000, Financial Crisis in 2008, Fed Tapering in 2013, EM crisis in 2015, Trade War & Fed Tightening in 2018.
What difficulties do we face in an income world?
Not much gain but more pain
Yields on traditional high yielding credits, such as high yield and EM bonds, are not high anymore. Government bonds (the safest kind of income-generating securities) are even minus.
Lower for longer on bond yields mean shortfalls for income
Fed, PBOC, ECB, BOJ have all made U-turns to dovish tone in monetary policy trying to prolong the business cycle and lent a big hand to ﬁnancial markets. But government bond yields known as safest income could be depressed at ultra-low level or even minus for an extended period, just like Japan’s lost decades.
Total market value of negative-yielding debt has piled up
Income hunting should be highly active and selective
AllianzGI Active management is the answer to enhance income at measured risks
Income can be found throughout the capital structure. With lower beta returns (what the broad market provides) likely for the next 10 years, investors need to diversify across asset classes to help capture opportunities. Active management helps us assess potential risks and returns.
Investment income provides many benefits – including guarding against inflation – but today’s “safe” bonds may offer no or ultra-low returns. We suggest investors hunt for income among “riskier” income generators like corporate bonds, emerging-market debt and dividend-paying stocks.
Thanks to positive macroeconomic news, China’s resilient growth and room to cut rates in India and Indonesia, the outlook for Asia-Pacific risk assets is good. Corporate bonds, emerging-market debt and dividend-paying stocks can play a critical role for investors in search of income potential.
Investors who need income and return potential should consider an active, balanced, global approach. Consider pairing high-quality investment-grade corporates, Treasuries and select securitised assets with infrastructure debt and higher-quality US, European and Asian high-yield bonds.
Higher yield potential and added diversification aren’t the only qualities attracting fixed-income investors to Asia. The region’s bond markets are large and growing, and reform-minded governments are providing the necessary policy support to maintain growth.