Investors should beware Great Rotation, says Morningstar OBSR’s Peter Toogood
Peter Toogood, investment director for Morningstar OBSR, says that there are few signs of a big rotation out of bonds into equities.
There are few signs on a global scale of a great rotation out of bonds, but there is certainly a trickle into equities. UK index-linked gilts headed the asset class return tables in March, surging 4% in response to the changed inflation remit in the recent budget. Yields dropped sharply in most main government bond markets but with gilts and bunds outperforming treasuries. This not only reflected some safe-haven support following developments in Cyprus, but also further cuts to economic forecasts and growing expectations of a further round of UK quantitative easing (QE) and rate cuts in the EU.
Emerging market debt had another poor month despite a number of investment managers recently launching products in the sector. Riskier credits continued to outperform in most of the main corporate bond markets with strong demand seemingly overcoming concerns that all time low yields and compressed spreads offer little if any value. The financial repression-caused “search for yield” continues.
Global equities closed out an excellent quarter for investors, especially those UK-based, with the MSCI World (AC) index surging 14% in sterling terms. Equity markets were once again led by the US and Japan, where the monetary boost is greatest and the economies strongest. While the US outperformed strongly on positive economic news, it is interesting to note that the near 4% index gain in March was led by the main ‘defensive’ sectors. This was also true within the UK and EU and is perhaps indicative of a more cautious approach to increasing equity exposure driven by exceptionally low bond yields, pushing investors towards the safer/higher yielding areas of the one asset class offering significant returns.
However, while equities appear preferable to bonds over the medium term, a more difficult immediate period lies ahead. The second quarter of 2013 may prove tougher for equities with the US facing a potential “growth scare” and the defensive areas of the market now by far the most expensive.