The Sunday Times reported this weekend of an end to the bond ‘craze’ and of a ‘wall of cash’ about to flee government bonds and land in the equity market. The paper quoted Goldman Sachs Asset Management chairman Jim O’Neill as saying his major institutional clients are starting to show renewed interest in equities. BlackRock, Fidelity and GLG are said to be observing similar signs.
It is hard not to feel a certain cynicism these reports are starting to emerge just days after the FTSE 100 hit 6,000 – a level not seen seen since the giddy exuberance of the pre-Lehman’s credit bubble. Nevertheless, if these large institutional asset managers are truly seeing a change of heart among their client base, it would be great news for equity investors. Two questions remain, however – which parts of the equity market are likely to benefit? And what happens to bond markets?
| “It is difficult to spin any good news for bond funds in this trend.” |
The Sunday Times report has been supported by early fund flow data from EPFR Global in January, which shows almost double the fund flows into equity funds as into bond funds. This may have been simply part of the ‘relief rally’ following the resolution of the US fiscal cliff, but it is also the extension of a trend that started in the last quarter of 2012, whereby investors had started slowly but surely to move away from government bonds in particular.
This new rally since the start of the year has been slightly different, however. Although money was moving into equities at the end of 2012, it was sticking with blue-chip, high-yielding equities. Safety was still at a premium. The recent rally has seen unloved areas such as Europe find some friends but the real winner has been emerging markets. Emerging markets funds attracted $3.4bn (£2.1bn) of the $5.06bn taken by all stock funds the first week of the year. US-focused funds, in contrast, attracted just $706m.
It is difficult to spin any good news for bond funds in this trend. The UK Gilt sector had already dropped 1.6% last month while corporate bond spreads are unattractively low by almost all metrics and income levels across most fixed income assets look low compared with equities. Any move out of bonds among institutional investors who have been buying consistently for a decade could exert a significant drag.
Perhaps the only good news for bond investors is that equity market noise is likely to continue as US politicians vacillate over the fiscal cliff. There may still be periods of ‘risk off’, which will give them time to reconsider their positions.
JANUARY 2013
Important Note: Material within this article has been complied with the help of the Marketing Hub which is part of Marketing In Practice Ltd on behalf of your professional financial adviser. The contents of this document do not constitute advice and should not be taken as a recommendation to purchase or invest in any financial product. The value of a market investment can go down as well as up and you may not get back the full amount, particularly in the short term. Before taking any decisions, we suggest you seek advice from a chartered financial planner.
