While Cordery concedes that the recent credit downgrades of Greece, Portugal and Spain have clearly been destabilising for markets and have hit investors’ risk appetite, he is of the view that fears over contagion risks may be overblown.

“We believe it is worth remembering that things do not tend to happen in a straight line and that the failure of one doesn’t necessarily mean the failure of all. Indeed, while we face the prospect that smaller European countries like Greece and Portugal are trapped in recession for some time to come, growth expectations for Europe as a whole do not appear to have changed significantly,” he said.

Cordery cites consensus forecasts which predict modest growth in Europe this and next year, with the large export-led economies such as France and Germany leading the recovery in GDP, and against this backdrop of modest growth Schroders views European corporate bonds as remaining attractive.

He notes that even last year – one of the worst recessionary periods in living memory – 99 per cent of rated investment grade firms did not default on their bonds, nor did 87 per cent of rated high yield firms, so going forwards into 2010 and 2011 Schroders envisages that the vast majority of firms will remain able to meet their coupon payments. While a “double dip” recession remains a risk, it is not Schroders base case scenario, he added.

One particular attraction to corporate bonds, according to Cordery, is the attractiveness of their valuations compared to government bonds and cash. While this spread has narrowed since March this year, corporate bond yields having fallen back to about 3.3 per cent (according to the Bank of America Merrill Lynch EMU Corporate Index, as at 5 May 2010) he notes that the spread of corporate bonds over government bonds is still over twice as high as in 2007. Furthermore, the spread over cash in today’s rock-bottom interest rate environment remains even higher.

In the coming twelve months Schroders is expecting corporate bonds to continue to outperform against cash and government bonds, with inflows coming both from pension funds attracted by the spread over government credit and individual investors hunting out higher yields.

One key threat to absolute returns to look out for over the next year, according to Cordery, is a significant repricing of government bonds which will make them too competitive relative to corporate bonds. The firm’s expectation is for the spread between corporates and governments to tighten, perhaps by half, driven primarily by rising government yields, he said.

Schroders is of the view that government bonds continue to seem overpriced, while in contrast many companies – both in the investment grade and high yield spaces – offer attractive value.

“In Euro corporate credit, yields of 5 per cent, 6 per cent and higher are still available on bonds from fundamentally solid firms,” concludes Cordery.