Investing in credits amid rising rates, high inflation: What you should consider

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  • Ms Tanya Sanwal, managing director, investment product & fund strategies, Wellington Management
  • Mr Samuel Rhee, chairman & chief investment officer, Endowus

Moderator: Genevieve Cua, wealth editor, The Business Time

Appetite for income in portfolios remains intense, even as challenges in the investment backdrop grow. Rising interest rates and higher inflation are raising questions about the fixed income asset class. Yet there are opportunities within fixed income, and credit in particular is worth a closer look. Our panellists explain.

Within the fixed income spectrum, credit investing is a viable option. What does it mean to invest in credits, and how does it differ from equity investing?

Mr Rhee: Investing in credit involves buying a bond that periodically pays out coupons for regular income and pays back the principal at maturity. The relatively lower risk and lower volatility, along with the offer of fixed income, are key characteristics of investing in bonds for income generation.

This is different from investing in equities, and receiving dividends paid out by companies – dividends are not fixed but are a variable amount or percentage of the share price. Dividends can be skipped or lowered. By contrast, coupon payments for bonds are meant to be guaranteed and if the company does not pay, they are in default. Additionally, equity prices are generally more volatile than bond prices; expectations of growth and earnings can change and affect stock prices, as well as dividends. Bond price changes can also be negative sometimes, but they typically move much less than equities.

Ms Sanwal: We have observed that investors are typically drawn to equities as they follow these markets, and many of the names might already be familiar to them. Further, there can be more upside in equities over the long term, albeit typically with more volatility.

Comparatively, credit markets are more complex. Within the fixed income market, there are multiple subsectors. There are investment-grade credit, high-yield credit, emerging market credit and more. It begs the question: What within the credit universe should I buy? Moreover, some parts of the markets are less well known than others, like bank loans, and so that complexity does cause some investor reluctance.

That said, we believe credit should remain a core allocation in an investment portfolio, as it can serve as a stable portfolio anchor. Credit has the potential to provide a higher level of income over the longer term with much less volatility relative to equities – where income can fluctuate, and capital appreciation can be very dependent on the economic environment – and a better drawdown profile. For investors looking to derisk from equities or who are less keen on lower-yielding government bonds, credit is a solid medium, as it can provide more stability regarding income and risk.