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Wealth Manager Outlook: The big bond to equity shift approaches

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by David Campbell on Nov 08, 2012 at 00:01

Overall, however, the quarter was marked by a remarkably rapid resurgence of optimism. The number of managers who said they expect global growth to rise has almost doubled, from 22.2% to 40.7%.

For the first time since May 2011, when the euro crisis first began to feel like an existential threat to the eurozone, 3.7% said they expected global growth to rise significantly.

This has fed through directly into inflationary expectations, and hence into the outlook on equity versus bond reversion. The number of managers expecting the rate of inflation to rise has increased from 25.9% to 40.7%, and 3.7% expect it to increase significantly for the first time since May.

 

Perhaps unsurprisingly as the business cycle and earnings seem to be peaking, managers have registered less of a bullish shift on the outlook for corporate profitability.

While the number expecting a short-term drop in profitability fell from 22.2% to 14.8%, those expecting little change or an increase remained essentially static, at 48.2% and 33.3%, respectively, from 48.1% and 33.3% in the previous quarter.

‘Investors are being squeezed, especially those seeking income, and so the real call is when to reduce your bond and cash exposure further, in favour of global equities,’ said Peter Lowman, chief investment officer at Investment Quorum.

 

‘Given that over the next 12 months investment returns on core Western government bond markets, and cash, will give investors negative real rates of return, adjusted for inflation, it may now be necessary for them to consider investing in a growth and income strategy. Indeed, investors will need to consider increasing their risk appetite by focusing on high-yielding bonds and global equity income, given that interest rates will remain lower for longer and that equities look better value than sovereign bonds.’

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3 comments so far. Why not have your say?

anil kumar

Nov 08, 2012 at 00:33

In my opinion,the demise of Corporate bonds yielding at least 5%,investment grade(at least BBB)is premature.

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Geoff Downs

Nov 08, 2012 at 11:49

I don't get where the long term inflationary pressure comes from. We have the example of Japan staring us in the face.

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tough enough

Nov 08, 2012 at 18:58

Same old same old ...I hold several prefs that just due to the income will have doubled my money in another another 6 years and they still yield 7% plus thats a fact ...not an opinion.

I also have several RPI index linked corporate bonds that I can hold to redemption ( and dont see a contradiction )....

If prefs fall substantially I will be delighted to step in and buy more and if inflation dosent happen ill get my coupon and my money back on the RPI linked.

I deal in facts not opinions

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