12 November 2019
By Gerald Moser, London UK, Chief Market Strategist
With returns in many asset classes likely to be muted in 2020, adopting strategies aimed at enhancing yields makes much sense.
We have been in favour of strategies that look to improve total return with yields since April 2019. Considering that we expect price returns to be fairly muted in 2020 across major asset classes, we would continue to look for enhancing total returns with yields.
Prefer safer yields over higher ones
There are several options to capture some yields. First of all, in equities, we have a preference for dividend growers. Companies growing their dividends tend to do better than high-dividend companies.
We would be cautious of buying companies based solely on the dividend yield. A disproportionally high dividend yield often reflects the market expecting that the company will cut its dividend at some point. By contrast, we think that either focusing on companies that are growing dividends or on companies with stable cash flows that have the financial strength to pay their dividends is a better strategy in equities.
In fixed income, we see the best risk/return reward from a yield perspective in emerging market (EM) debt. As with equities, we would not chase the highest yield. Considering the late stage of the economic cycle, we think it is too risky to sacrifice strength to chase higher coupon in the junk bond part of the market. On the corporate side, we see opportunities to pick up yield in BBB-rated bonds, especially when extending duration.
In fixed income, we see the best risk/return reward from a yield perspective in emerging market debt.
Spreads are already tight in the high yield space and we see little room for improvement. On the contrary, we expect EM economies to improve slightly in 2020 compared with 2019. Furthermore, we see opportunities for EM fixed income to add yields in a portfolio while mitigating risks of a large increase in spreads.
Volatility provides good opportunity for yield enhancement
Volatility is one area where we see good opportunities for total return enhancement. Rising uncertainties are likely to translate to higher premium for insurance against a market sell-off. This is a good time to set up strategies that consistently aim to extract this higher premium from the market.
In order to be effective and relatively safe, those strategies collecting premium should be systematic and focused on collecting short-dated premium. A short-term contract provides the opportunity to renegotiate the premiums more frequently, allowing potentially higher premium income.
And doing it systematically can capture spikes in volatility without worrying about timing. It also reduces the risk of being caught wrong-footed with the timing for selling volatility. When done properly, a volatility-selling strategy should add positive performance to a portfolio.
When done properly, a volatility-selling strategy should add positive performance to a portfolio.
We give you versatility and a choice of services
Barclays Private Bank provides discretionary and advisory investment services, investments to help plan your wealth and for professionals, access to market.
Investments can fall as well as rise in value. Your capital or the income generated from your investment may be at risk.
This document has been issued by the Investments division at Barclays Private Banking and Overseas Services (“PBOS”) division and is not a product of the Barclays Research department. Any views expressed may differ from those of Barclays Research. All opinions and estimates included in this document constitute our judgment as of the date of the document and may be subject to change without notice. No representation is made as to the accuracy of the assumptions made within, or completeness of, any modeling, scenario analysis or back-testing.
Barclays is not responsible for information stated to be obtained or derived from third party sources or statistical services, and we do not guarantee the information’s accuracy which may be incomplete or condensed.
This document has been prepared for information purposes only and does not constitute a prospectus, an offer, invitation or solicitation to buy or sell securities and is not intended to provide the sole basis for any evaluation of the securities or any other instrument, which may be discussed in it.
Any offer or entry into any transaction requires Barclays’ subsequent formal agreement which will be subject to internal approvals and execution of binding transaction documents. Any past or simulated past performance including back-testing, modeling or scenario analysis contained herein does not predict and is no indication as to future performance. The value of any investment may also fluctuate as a result of market changes.
The value of any investment may also fluctuate as a result of market changes.
Neither Barclays, its affiliates nor any of its directors, officers, employees, representatives or agents, accepts any liability whatsoever for any direct, indirect or consequential losses (in contract, tort or otherwise) arising from the use of this communication or its contents or reliance on the information contained herein, except to the extent this would be prohibited by law or regulation.
This document and the information contained herein may only be distributed and published in jurisdictions in which such distribution and publication is permitted. You may not distribute this document, in whole or part, without our prior, express written permission. Law or regulation in certain countries may restrict the manner of distribution of this document and persons who come into possession of this document are required to inform themselves of and observe such restrictions.
The contents herein do not constitute investment, legal, tax, accounting or other advice. You should consider your own financial situation, objectives and needs, and conduct your own independent investigation and assessment of the contents of this document, including obtaining investment, legal, tax, accounting and such other advice as you consider necessary or appropriate, before making any investment or other decision.
THIS COMMUNICATION IS PROVIDED FOR INFORMATION PURPOSES ONLY AND IT IS SUBJECT TO CHANGE. IT IS INDICATIVE ONLY AND IS NOT BINDING.