Wealth Manager Outlook: The big bond to equity shift approaches

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.’