Bonds and high-yield equities still hot favourites for second half, say asset managers

The global financial market has entered a strange phase, with stock markets shrugging off the uncertainties after the Brexit vote to reach new highs, as the continuous drop in bond yields indicates that investors are seeking absolute returns to avoid risk.

Analysts said a diversified bond portfolio may still be the best choice in the third quarter despite the slippery slope of bond yields, as well as high-yield equities and gold.

Will Leung Chun-fai, head of investment strategy for wealth management at Standard Chartered, said bonds are likely to deliver positive absolute returns and better rewards compared to equities and commodities in the second half of the year.

“We prefer corporate bonds over government bonds,” Leung said. “US investment grade corporate bonds are our top pick due to the attractive combination of quality and reasonable yields on offer.”

Asian US dollar-denominated bonds are the next best, followed by developed market high yield bonds, Leung said.

Although the bond market rally after the Brexit vote has reduced bond yields compared to the start of the year – and some bonds are delivering negative yields nowadays – Leung said lower global economic growth expectations, geopolitical risks and easy monetary policy are factors likely to support global bonds and keep yields close to current levels.