- U.S. corporate bonds could post returns of 8 to 10 percent over the next 12 months, providing an attractive alternative to stocks, Margaret Patel, senior portfolio manager at Evergreen Investments, said on Monday.
Stocks may not stage a sustained rally until at least late spring 2009 as corporate profits remain under pressure, Patel told the Reuters Investment Outlook Summit in New York.
In the meantime, investment-grade corporate bonds "are a very attractive place to be in an uncertain world," said Patel, who manages both stocks and bonds for Evergreen Investments.
With prices beaten down by relentless selling, investors have the rare opportunity to buy high-grade bonds at a discount, picking up both attractive yields and capital appreciation when the market recovers, she said.
"In a world where it's not clear when the economy is going to be bottoming out or when profits are going to be going up, I think that looks like a pretty attractive place to be," she said.
Potential returns in high-grade corporate bonds are at least as good as those expected from defensive stocks, without the downside if the economy gets much weaker, she said.
Top-tier high-yield bonds could perform even better, returning 15 to 20 percent annualized over a two-year period, Patel said. Though defaults are expected to rise substantially, the top tier of the high-yield market has very little default risk, she said.
Yields on junk, or high-yield bonds, have surged amid massive selling by hedge funds meeting redemptions or margin calls. Top-quality junk bonds rated "BB" have been battered with the rest, sending yields above 16 percent, according to Merrill Lynch data.
Many of those bonds are selling for 80 to 90 cents on the dollar, creating attractive capital appreciation potential, Patel said.
"Today, for a little more risk you can get a lot more return," she said.
Patel said she expects economically sensitive stocks to lead a rebound in equities because their prices already reflect a severe economic outlook. Sectors that could lead the rally include utilities, energy and energy services companies, and health care companies not subject to reimbursement pressures, she said.
