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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

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%.

 

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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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