The equity cult alive and kicking, despite deflation threat
Anyone betting on another “Great Rotation” of investment flows out of bonds and into stocks is in for disappointment: it’s not happening, and isn’t going to.
In a world where deflation, never the most fertile ground for equities, is a bigger concern for policymakers than inflation, that seems a pretty safe call – but the surprise is that this time around both asset classes may be on to a winner.
Bonds tend to do better than stocks when inflation is weak because the value of the fixed income payments investors receive is protected.
But many of the world’s leading investment banks argue that the broader market backdrop – also characterized by low interest rates, low returns and high cash balances – leaves stocks just as well-positioned to benefit as bonds.
Even as the U.S. Federal Reserve withdraws its stimulus, there is a surplus of savings and central bank liquidity in the global financial system that needs to find an investment home.
As a group, U.S. financial institutions are among the biggest investors on the planet, with more than $60 trillion of assets under management, according to UBS. And they are loading up on stocks.
To be sure, equities aren’t cheap right now, particularly U.S. stocks. The S&P 500 has risen 170 percent from its post-crisis low in early 2009, and other developed markets have performed similarly well.
The “equity risk” premium – how much more stocks are expected to return than bonds – is more than 7 percent in the euro zone and UK, and 10 percent in Japan. Even the lower U.S. premium of 6 percent, which suggests Wall Street is starting to look a little expensive, still offers a decent return.
“Investors have no option but to accept higher risk if they wish to meet their future income requirements,” said Keith Wade, strategist at fund management giant Schroders in London.
Citi predicts global stocks will rise a further 21 percent by the end of next year, while Barclays says European stocks are cheaper than at any point in the last 10 years because investors are pricing in a growth and deflation scenario that is “more pessimistic than warranted”.
Source: Reuters-The equity cult alive and kicking, despite deflation threat
