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What will it take to unleash the cash locked up in credit?

What will it take to unleash the cash locked up in credit?

There has been much speculation on when value could lure investors back into equities, but signs this is already underway may be misleading.

The latest data from the Investment Management Association (IMA) showed that bond funds were no longer the favoured draw in September. The month saw net retail inflows of £541 million into equity funds, a return to their 2011 peak, while fixed income funds attracted a net £320 million. This was the lowest net monthly sales total for bond funds in 12 months.

But dig a little deeper and it seems fears about political uncertainty and low growth are still unnerving investors. In the days and weeks after the IMA released its data, equity fund sales started to peter out.

Since May, the equity-bond yield ratio has almost consistently been in favour of equities over credit, using the iShares FTSE 100 as a proxy for the UK’s main index.

While this indicator has historically been used by investors to analyse buy signals in equities and credit, according to consultancy EPFR Global, which monitors flows between mutual funds, fears about Europe and wider economic woes now swamp any positivity surrounding equities, forcing investors to hold on to credit. 

This is evident in flows into bond funds, which recorded their biggest inflow since May in the final week of September as the picture turned sour in Spain and a bailout looked certain.

Moreover, while global equity funds attracted $1.8 billion in inflows during the week ended 26 September, bond funds took in a whopping $7.6 billion, seeing them maintain their steady 52-week lead over equities.

Adding to this, while the IMA statistics show that retail investors have been busy topping up on equities, a different picture emerges when the views of professional investors are crunched.

The latest quarterly Wealth Manager survey, which canvassed leading private client investment managers about their latest asset allocation calls, found they are warming to equities but not recycling money into the asset class by reducing their bond holdings.

There has been a shift into equities, on aggregate, over the past three months, but this is vastly different from a wave of investors moving from one asset class into another.

David Man, a partner at RMG Wealth, said that after a 30-year bull market in credit it is easy to understand why a genuine shift has still to occur.

‘Investors want two things, certainty and income. Corporate bonds still provide for those needs,’ he said. ‘As yields continue to drop some investors – those with a greater or longer-term risk appetite – are able to look beyond equity risk and begin to focus on the dividends of high quality companies. They are able to move along the risk curve.’

But Man cautioned: ‘For a major shift to occur, we believe we need to see the certainty of equity return come back alongside a trust in equities that is simply not present, even now. What would signal that trust would be either a market rerating, which could take a few years, or the market to fall.’

Jan Loeys, head of global asset allocation at JP Morgan, said the political landscape is blocking the switch between credit and equities that many feel will eventually be inevitable.

He pointed to the looming presidential elections in the US and the fiscal cliff risk, as well as a ‘whole host of forces’ holding back growth.

‘Value dictates that long-term investors start switching from credit to equities, but low growth, fiscal uncertainties, attractive credit spreads and little sign of worsening credit fundamentals keep us overweight both equity and credit,’ he added.

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