Today’s income-friendly environment currently offers high levels of yield, but also presents an opportunity for a rise in bond prices.
Within the IA Sterling Corporate Bond sector, I recommend considering TwentyFour Corporate Bond and M&G Strategic Corporate Bond.
For a lower-risk option, government bonds such as gilts or treasuries can provide a steady income and act as a portfolio stabiliser during market downturns due to their often negative correlation with equities.
The Reit time
Real estate investment trusts (Reits) also present attractive value and income potential, especially as interest rates start to decline.
Reits are companies that own, operate or finance income-producing real estate across a wide range of property sectors, from rental property to data warehouses.
Lower interest rates reduce borrowing costs, making home-buying and commercial leases more affordable. This can lead to increased demand in property markets and a potential boost in real estate values.
While managing physical assets typically leads to higher operating costs – resulting in higher fees compared to equity trusts – there are still cost-effective ways to tap into a Reit recovery.
One such option is the TR Property Investment Trust (TRY), which owns a portfolio of Reits, as well as directly investing in property assets. This one-stop-shop offers a compelling opportunity for investors seeking broad-exposure Reits, and charges 0.82pc, which is low relative to the sector.
I would also consider Cohen & Steers European Real Estate Securities and CT European Real Estate Securities.
Shares to shine
Falling rates typically reduce borrowing costs for companies, which can help boost profit margins and growth. This tends to benefit many sectors, especially those reliant on borrowing to fuel expansion, such as technology and consumer goods.
Lower rates can also push more investors toward equities as bonds become less attractive. However, some sectors, such as financials, may experience compressed interest margins, which can hurt profitability.
Sectors such as technology and long-term growth stocks generally benefit from falling rates, as cheaper capital makes it easier for these companies to finance future projects and investments. Here I like diversified global strategies such as Evenlode Global Income and Guinness Global Innovators.
Meanwhile, commodities such as oil may lose some of their lustre in a falling rate environment – especially if inflation concerns ease.