Why a bond bear market would not derail equities

Canny investors should have heeded the “clear signal” to buy equities in December, as they are set to rise despite the threat of a bear market in bonds, said Investec’s Max King.

In an April strategy outlook, the portfolio manager on Investec’s global asset allocation team said the rally in equities in Q1 took many investors by surprise, although “it is hard to remember a market upturn that was better flagged”.

Investec’s asset allocation team has tipped both developed and emerging market equities to trend upwards in the medium term, driven by robust corporate earnings.

“Continued earnings growth in 2013 promises further upside next year. However, a short-term market setback is possible, and last year’s down-trend to earnings forecasts could resume.

A further upsurge in the oil price would reduce growth, raise inflation and eat into corporate earnings….although the oil price would have to jump to $150 a barrel to have an effect,” said King (pictured).

Meanwhile he said equities are likely to escape unscathed even if there is a bear market in government bonds, judging by history.

“The weakness in government bond markets has caused some investors to worry that a sustained bear market in bonds could be negative for equities. However, this is not consistent with the pattern of recent years, in which equities and bonds have moved in different directions.

“Since 1982, there have been seven bear markets in bonds, each involving losses of 15%-20% in US 30-year treasuries. Not one of these bear markets has caused a bear market in equities – two have coincided with flat equity markets (in 1984 and 1994), and five have coincided with big equity gains.”

A bad day for bonds could pull down equities, King added, but on any other timescale it could be positive for equities because it would indicate a return of market confidence.

Even the threat of collapse of another eurozone nation will not be enough to derail equities’ upwards trajectory, according to King.

“Investors ignored Greece’s default and will probably ignore the next domino to fall. The eventual grand finale of the eurozone crisis may provide the last great buying opportunity before the bull market starts in earnest, but there is no reason to believe it will take markets lower than current levels.”

 

This article was first published on Investment Week

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