Look to UK not Europe for income opportunities, says Schroders

20th February 2015

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Those looking for good investment opportunities this year should stick to the UK, where consumer cyclicals and financials are providing income.

 

Michael Scott, manager of the Schroder Monthly High Income fund, said the UK is in good shape when compared to the rest of Europe and is a better bet than the eurozone for finding high-yielding income opportunities.

 

‘The high yield universe is large enough to find value tucked away in any one of the markets we invest in, but at the moment we do see a lot of opportunities in sterling credit,’ he said. ‘Spreads, the differential in yield between corporate bonds and equivalent government bonds, in sterling credit are significantly wider than euro equivalents. We have taken a positive view on bonds with a ‘B’ credit rating in particular.’

 

Scott identified value in two specific sectors; consumer cyclicals and financials in which he has built an overweight position, ‘particularly because of the lower oil price’ which will give consumers more money in their pocket.

 

‘There are bonds which should benefit form the higher levels of disposable income,’ he said. ‘We also like certain legacy financial assets, as they offer what we believe to be attractive yields relative to their potential volatility.’

 

While the UK economy may be full of opportunities that does not mean there are risks, particular around the raising of interest rates in the US and UK which will impact bond yields.

 

‘There is the possibility of a hawkish turn from the Federal Reserve, the Bank of England or both,’ said Scott.

 

‘The Fed has confirmed it will be patient in its approach to tightening, but it is very unlikely to raise rates in the next 12 months. The UK general election may keep a Bank of England rate hike at bay for the time being, but equally, the uncertainty surrounding the vote is likely to generate its own market fluctuations.’

 

Scott added that the conflict in Russia and Ukraine also remains ‘a threat to market stability’ and the damage done to the Germany economy by a slowdown in China has not disappeared.

 

‘However, while we expect volatility to rise, we believe this will provide ample opportunity to add to outperformance for diligent and active managers,’ said Scott.

 

 

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