Alexander Pelteshki, Investment Manager at Aegon Asset Management: People my age and up will remember that for all of mankind (or since 1930, when Pluto was first discovered), the solar system consisted of nine planets. Then in 2006 a monumental event happened when the International Astronomical Union downgraded Pluto to a ‘dwarf planet’ status. This essentially meant that from that day on, our solar system would consist of eight planets only, and Pluto wasn’t one of them anymore.
“It has been sixteen years since, a rounding error in the context of a planetary life cycle, but a whole lot in the investment world. This is approximately how long it took for the Investment Grade Credit index to again look that attractive relative to the stock market.
“As of October 2022, the Yield to Worst (YTW) on the IG index exceeds 6%. This is more than three times its yield just a year ago. Furthermore, the IG index has only very briefly had a yield of more than 6% in the past 16 years, and the last time was pre-2010. Last and most interesting, we reckon, is the fact that 2022 marks the first time in c.16 years when the difference between the yields of the IG index and the earnings yield of the S&P 500 index is again positive.
“We believe that aside from the all-in attractiveness of Investment Grade, which we have previously discussed, this has a profound implication for asset allocation decisions globally too. It offers a rare opportunity for investors to move up the capital structure and pick up yield while doing so.
“Naturally, equity earnings yield is subject to the actual earnings coming through as expected (and is thereby subject to change), whereas a bond yield is pretty much guaranteed (bar a default). This degree of certainty would appeal to even the more conservative income-oriented strategies, while still leaving plenty of upside room for growth too. We believe that this trade off would make a lot of sense in an economic environment where consensus expectations about global growth are fairly negative. All in, it is yet another reason why we have turned more positive on Investment Grade credit here on a twelve-month horizon.”
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