Oppenheimer's Steinmetz favors high-yield credit
NEW YORK (Reuters) - While equities hold appeal in today's marketplace, high-yield U.S. credit offers likely double-digit returns with less risk for investors who prefer a more certain outcome, the chief investment officer at OppenheimerFunds said on Wednesday.
Art Steinmetz, who also co-manages several funds at OppenheimerFunds, said high-yielding junk bonds and corporate debt are his top choices. He also finds high dividend-paying stocks and emerging market debt attractive.
"We are in the sweet spot for higher-yielding credit," Steinmetz told the 2012 Reuters Investment Outlook Summit in New York.
"We know we can't get excited about government debt. Even though we don't think rates are going to go up, they can't go down," he said.
With inflation at higher rates than government debt and the Federal Reserve committed to holding down interest rates well into 2013, "people who invest in core bond portfolios are going to have the certainty of losing money slowly," he said.
Investors could see returns of 15 percent to 20 percent on U.S. credit paying about a 9 percent yield, and 10 percent price appreciation on bonds with a five-year duration, he said.
High-yield corporate bonds and munis are priced such that they offer ample compensation for what will certainly be elevated default rates in the years to come, Steinmetz said, although he sees the number of defaults unlikely to be as high as the recession years of 2009 or 1991.
"You're getting paid for a worse outcome than we've ever seen," said Steinmetz, who oversees about $170 billion in assets at Oppenheimer.
The United States is now in an environment akin to post-World War Two when "real," or inflation-adjusted, yields on government debt were negative for many years, Steinmetz said. Investors eventually sought better returns in equities, which took a quarter century to surpass pre-crash levels of 1929.
"Negative real rates on Treasuries are going to challenge orthodox views of portfolio construction and asset allocation for years to come," Steinmetz said.
The benchmark Standard & Poor's 500 Index .SPX is yielding about 2.15 percent, while the benchmark 10-year U.S. Treasury note yielded 2.02 percent on Wednesday.
"There may be better places to go, but there's risk and reward, there's certainty," said Steinmetz, citing a popular saying.
"There's a bird in the hand and two in the bush. Well, dividend-paying equities are the bird in the hand," he said.
"You can't make a general bullish statement about equities with a high degree of certainly because (economic) growth is going to be challenged," he said. Companies also are hoarding cash, which will crimp earnings, he said.
The strong fiscal profile of many emerging market countries makes their debt attractive, especially Brazil, because of its high interest rates relative to inflation.
OppenheimerFunds is betting the fear of inflation in Brazil will eventually subside, allowing government interest rates to fall well below 10 percent.
The benchmark Selic interest rate in Brazil is now 11 percent and is expected to fall to as low as 9 percent by the end of next year, according to a Reuters poll. Brazilian inflation is running at just under 7 percent annually.
"This is a trade we've had on for years and years already. We rode that yield curve evolution in Mexico for years and we're going to ride it in Brazil," Steinmetz said.
"We want to be very far out on the yield curve in Brazil because we think there are profits to be made in duration," he said. "Six months is too short a horizon."
(Reporting by Herbert Lash; Editing by Leslie Adler)
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