Weighing the income conundrum

June 23, 2020

Weighing the income conundrum
 

The economic challenge currently faced by companies is immense and may be greater than at any time since World War II. Many firms have switched from maximizing shareholder value through share buybacks and dividends, to focus on keeping their businesses alive as they react to significant drops in cash flow. In our view, not all companies will be successful in doing so.

For investors, the collapse in dividend pay-outs could refocus their attention on bond income, which is contractual and possibly more stable. The economic uncertainty has raised the potential for bond downgrades and defaults, but has raised the yield available on a broad universe of corporate bonds, thereby improving the income stream.

Another element of behavioral change is the potential for companies and investors to have a higher level of savings in the future to combat the uncertainty as the Covid-19 coronavirus takes time to dissipate.

Paul Brain, Investment leader of fixed income, Newton Investment Management

Definitions:

IMF: The International Monetary Fund is a Washington D.C. headquartered international organization, comprised of 189 countries, which aims to reduce global poverty, encouraging international trade, and promoting financial stability and economic growth.

GDP: Gross Domestic Product is the monetary value of all finished goods and services made within a country during a specific period. It is used to measure the size of an economy and economic growth rate.

IA Sterling Corporate Bond TR in GB: This is an Investment Association fund sector index that tracks the performance of the sterling-denominated corporate bond universe.

IA Sterling HY TR in GB: This is an Investment Association fund sector index that tracks the performance of the sterling-denominated high-yield bond universe.

Charts are provided for illustrative purposes and are not indicative of the past or future performance of any BNY Mellon Investment Management product.

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