The economic challenge currently faced by companies is immense and greater than at any time since World War II. Many firms have switched from maximising shareholder value through share buybacks and dividends, to focus on keeping their businesses alive as they react to significant drops in cash flow. In our view, not all companies will be successful in doing so.
For investors, the collapse in dividend pay-outs could refocus their attention on bond income, which is contractual and therefore more stable. The economic uncertainty has raised the potential for bond downgrades and defaults, but has raised the yield available on a broad universe of corporate bonds, thereby improving the income stream in the future.
Another element of behavioural change is the potential for companies and investors to have a higher level of savings in the future to combat the uncertainty as the Covid-19 coronavirus takes time to dissipate.
Paul Brain, investment leader fixed income team, Newton Investment Management.