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Flash crash an opportunity for high yields

In an environment where financial markets are experiencing not just a summer cold, but a serious bout of fever – fund houses are prepping themselves to move in when the perfect storm forms.

Income opportunities from alternative sources remain attractive, and a flash crash should be viewed as a flash opportunity, Asoka Wöhrmann, CIO of Deutsche Asset & Wealth Management, said late last week.

“As many [investors] have taken similar positions and used similar risk-mitigation strategies, we are in for flash crashes – a phenomenon which we are fearing for some time now,” Wöhrmann said.

Wöhrmann noted that the decline in commodity prices, which is thought to be a sign of a global slowdown, could be misleading.

While oil is suffering from a price shock – OPEC, Iran and US shale production are all higher than expected. Steel and other industrial metals prices are falling because demand from China is sluggish. This does not tell us much about the global economy as a whole,” Wöhrmann said.

Ken Leech, Western Asset Management’s CIO, shares a similar view. He noted that while the fear of defaults is increasing in the high-yield bonds segment, particularly for energy and commodity, this “minor move-up” of an estimated 3% is not enough to invalidate the sector.

“We still think [high yield bonds] are attractive and this is a sector that needs to be in our plus portfolios,” Leech said.

Elaine Stokes, portfolio manager at Loomis, Sayles & Company, echoed both Wöhrmann’s and Leech’s sentiments. “The US is on solid footing, Europe is improving and China is slowing, but retains policy tools to spur economic activity. [In this environment], building diversification into portfolios by using plus sectors such as high-yield convertibles is becoming more important,” she said.

“These asset classes have historically had a low or even negative correlation with rising rates – so securities may appreciate in price as rates move higher,” she added.

Part of the Mark Allen Group.