Buy Side Seemingly Dithering Over Great Push Back Into Equities

Terry Flanagan

Despite recent market talk in Europe of a paradigm shift back into equities from fixed income, it appears that it may not be quite as simple as that.

A recent December 2012 study by analyst Camradata, who surveyed a number of pension funds, insurers and asset managers, found that despite institutional investors identifying equities as the biggest opportunity in 2013 for high returns, none of those surveyed were actually planning on investing in the asset class due to perceived long-term worries over the health of the eurozone and potential fallout from the U.S. fiscal cliff talks.

“On the one hand, there was agreement that equities will offer high returns,” said Steve Butler, founder and managing director of Camradata. “On the other, no-one was willing to write the cheque. We can only guess that the specter of volatility continues to stalk this asset class.”

December 2012 signaled a five-year low for European equity trading, dropping to levels not seen since December 2008—just three months after the collapse of Lehman Brothers—but the macroeconomic picture now appears to be settling down slightly with early signs of stabilization in U.S. and European markets, all of which is encouraging riskier plays, such as equities, back on to the table.

Add to this the prolonged low interest rate environment, falling yields in the fixed income space and building inflationary pressures generally and many market participants have been telling Markets Media in the past few weeks that 2013 could well be the year of equities.

One was Mark Parsonson, executive director of U.K.-based fund of hedge funds manager Liongate Capital Management, who said: “We are definitely seeing a comeback for equities; we think this could be a strong theme in 2013.”

Even fixed income managers are becoming bearish in their tone when talking about bonds, which have been a safe-haven asset for many investors since the onset of the financial crisis.

Yannick Naud, portfolio manager, Glendevon King Asset Management

Yannick Naud, portfolio manager, Glendevon King Asset Management

“Core European long-term government bonds are not really providing value right now,” said Yannick Naud, portfolio manager at Glendevon King Asset Management, a fixed income boutique based in London.

Nicolas Forest, head of interest rates and forex strategy at banking group Dexia’s asset management arm, added: “In view of the expensive nature of numerous [government] bonds, investors will have to dig into their reserves of ingenuity to improve their prospects of returns.”
And it seems that it is only certain areas of fixed income, such as more risky high yield plays, that are still holding some appeal.

“We think there is still some value in the credit market, and we are overweight high yield over investment grade: although high yield looks more and more a carry trade, the default cycle still looks benign at the moment, hence we feel comfortable in holding high-yield bonds for the first part of the year,” said Naud at Glendevon King Asset Management. “Nonetheless, diversification, name selection and sectors is always key.”

Naud also highlighted that value can still be found in Norwegian krone corporate bonds as well as European convertible bonds.

“Bond yields and credit spreads are at very low levels across the credit spectrum,” said Naud. “Therefore, we see limited additional total return potential from a benchmark corporate bond; on the contrary with convertible bonds we buy the optionality attached to the equity exposure, i.e. if the bull market persists the equity market should have more upside than the credit market. The market risk of a well diversified portfolio of convertible bonds is relatively easy to hedge, should the conditions change.”

So, it seems that the recent appeal of fixed income as an asset class to ride out the slump appears on its way out—for now at least—as market signals are beginning to persuade some to move back into equities. Although it appears that the institutional trader may need more of a nudge yet before he or she is fully convinced.

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