The search for yield is a much-debated issue as low interest rates prevail against a backdrop of benign inflation and a fragile economic recovery.
Savers are making use of a diverse range of income generating investments to replace interest lost from bank and building society accounts. UK corporate bonds were long regarded as an alternative to savings accounts or gilts, offering superior and stable yields, for a little more risk. However, as interest rates fell, so too did the yields attainable on corporate bonds. To achieve improved returns from the bond markets, investors are now considering overseas bonds.
Though the potential for higher returns inevitably carries a greater degree of risk. For example, the five-year 7 per cent bond issued by the Iraq government was recently oversubscribed, and even Greece successfully raised $3.5bn in its first debt issue for three years. Egypt, Argentina, Nigeria and Ivory Coast have all succeeded in placing large bond issues this year with high single-digit coupon rates, and not one of them has a credit rating that comes close to investment grade!
It seems some investors are prepared take on significant risk, and even forego some of the certainty of regular income payments, in return for a theoretical yield far superior to that of the 10-year gilt yield, which is a little over 1 per cent. As appealing as these returns appear to be, it is very important to do your homework.
One country which is compelling from both a debt and equity point of view is India. Having undergone a series of tax reforms, India now has a resilient economy. Indian bonds can yield over 6 per cent and, given a real yield of 4 per cent, they are some of the most attractive in the Emerging Market bond arena.
Investing directly in Emerging Market bonds is a high-risk strategy and therefore we advocate the use of collective investments, run by specialist fund managers. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. Investors should refer to their financial adviser to ensure our service is suitable for their investment needs.