Wealth Manager Outlook: The big bond to equity shift approaches

Wealth managers are braced for a reversal in the 30-year trend of bond outperformance versus equities as unlimited quantitative easing (QE) in the US begins to feed through to long-term inflationary expectations.

Following US Federal Reserve chairman Ben Bernanke’s commitment to carry on printing money for as long as it takes for the economy to stabilise, most managers have cautiously upgraded their expectations for the next 12 months and reorientated their portfolios towards risk assets.

That commitment had a polarising effect on respondents to Wealth Manager’s Quarterly Outlook, however, with a minority fearful that central bank policy had baked unrealistic risk premiums into equity markets, which would ultimately run up against economic reality.

‘Sell any form of fixed interest, especially corporate bonds,’ was the uncompromising view of Charteris chief executive Ian Williams, when asked what would be the most critical call over the next 12 months.

Most clients are currently ‘wondering whether equities will ever resume their outperformance over bonds,’ added John Clarke, chief investment officer at GHC. ‘They will in 2013.’

After marginal portfolio changes during the second quarter of 2012, the stark move towards easing has helped solidify conviction, with managers putting their money where their mouth is. While underweight positions in Western equity stayed more or less unchanged over the quarter, there was a stampede out of neutral positions.

Out of neutral

Neutral European equity positions fell from 40.7% to 29.6% and neutral UK positions from 50% to 40.7%. Overweights rose from 14.8% to 25.9% and from 34.6% to 44.4%, respectively.

In an illustration of the faultlines over monetary easing, this happened in tandem to managers buying back into developed sovereign debt, with underweights falling from 85.2% to 77.8% over the quarter, while overweights rose from 3.7% to 7.4%.