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High yield could outperform equities in 2002

GLOBAL- Performance of high yield bonds is set to pick up this year after a disappointing 2001 and could conceivably beat equities for less risk according to AXA Investment Managers.

Ashley Goldblatt, UK director of fixed interest, says there are precedents to lend credibility to the belief that the high yield market is set for a good year.

AXA predicts the default rates in the US market this year will be roughly the same as 2001 and, although this appears discouraging, it mirrors the market during the early 1990s which saw increased high yield returns driven by an anticipated recovery.

Defaults in 1990 and 1991 were the same but returns improved from –4.4% to 39.2% over the period in anticipation of economic recovery and lower default rates. As predicted, default rates in 1992 fell by 50%.

Says Goldblatt: “after the disappointments of 2001, the high yield market is poised to enter a recovery stage and the outlook is favourable. When the recovery does take place, and with the pace that we envisage, the high yield market will be a profitable area in which to invest.”

The announcement comes at a time when ratings agency Standard & Poor’s has predicted that the level of default rates will peak during 2002 and ease off towards the end of the year as credit quality improves and the economy rebounds.

S&P’s figures show that the level of corporate defaults world-wide soared in 2001 and broke the 200 level mark, making it the third successive record year. During 2001, 216 rated (and formerly rated) issuers defaulted on combined debts of $116bn. During 2000 there were 132 defaults worth a total $42bn.

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