2024: Bond picking instead of stock picking

The stock markets have had a strong run, and at least a partial correction is always a possibility. "If you want to benefit from the success of companies despite the high valuations of shares, you should also take a targeted look at corporate bonds," says Mathias Beil, Head of Private Banking at Hamburg-based Sutor Bank. "This can be a very promising strategy in 2024."

At first glance, the risk appears to have increased. "The default rates for high-yield corporate bonds have been above average," says Beil. "In December 2023, defaults rose sharply, especially in Europe." There, the rating agency Moody's placed eight of the issuers it rated in default status, i.e. listed them as defaults. Such a high number of European corporate defaults in a single month had only occurred once before in recent years, when eight Ukrainian banks slipped into default status at the start of the Russian war of aggression in February 2022.

"However, this poor December figure should not lead to a dramatic wave of bankruptcies for Europe," says Beil. "The eight December defaults included three companies from the UK and two companies from one group." For 2023 as a whole, defaults in Europe rose to 31 after 24 defaults in the previous year, including the eight Ukrainian banks, while Russian companies were no longer included at all. The last time there was a higher number of defaults in Europe was in 2020 with 40 defaults.

As a result, the default rate for high yields in Europe climbed to 3.6 percent after 2.8 percent in the previous year. "In relation to all of the companies rated by Moody's with a rating in the lower-rated high-yield segment, this figure is around the long-term average since 1999," says Beil.

Which is why a targeted look at corporate bonds can also be worthwhile as an alternative to company shares. "We have held bonds in our conservative portfolios again since 2023," says Beil. "When selecting securities, we only buy investment grade bonds." This can pay off. "Anyone who bought the 4.125% Porsche 23/27 bond, for example, has achieved a price gain of 2.59% in addition to the coupon," says Beil. "And the 3.375 percent Volkswagen Financial Services 20/28 performed even better, with the bond gaining 3.32 percent in addition to the coupon." However, the decisive factor in this shift from stock picking to bond picking is always to pay attention to the quality of the company.