The sharp rebound of global stocks and investment-grade bonds in the second quarter left higher-income assets behind. But that also means there’s pent-up potential in income-generating assets that may begin to show in later stages of the recovery.

Investors are still deciphering return patterns of the coronavirus markets. In the first quarter, risk assets sold off broadly. Yet the rapid recovery in the second quarter was uneven. Growth stocks led, while income assets such as real estate investment trusts (REITs), high-dividend stocks and high-yield bonds posted much more modest gains (Display). As a result, REITs were still down by 21% in the first half of the year, and high-dividend stocks were down 13% as shown by the black diamonds above. Other equities recovered most of their losses while some even crossed into positive territory for the year to June 30.

Why Have Investors Shunned Income?

Concerns about income assets are understandable. Dividend payments are in question as earnings are squeezed, while high-yield issuers face higher default risks in a recessionary environment.

But history suggests that income assets take time to recover from systemic adversity. After previous crises, recoveries unfolded in stages, with each phase featuring different leadership. For example, after the global financial crisis (GFC), corporate bonds led at first while equities and REITs took a further step down. In later stages, equities were reenergized and a broader recovery developed.