PA ANALYSIS: Is it the right time to be piling into bonds?

By John Lappin

Added 10th July 2017

Portfolio advisers have been looking at equity market valuations rather nervously for some time tilting towards less risky assets, taking profits and holding more cash.

PA ANALYSIS: Is it the right time to be piling into bonds?

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But has broader sentiment now caught up?

The Investment Association (IA) statistics for May £230m invested in the IA Sterling Strategic Bond sector, while UK equity funds experienced a net retail outflow of £479m. UK All Companies saw outflows of £532.1m, while UK equity income lost £23.1m.

Nexus IFA director Kerry Nelson says this could signal a shift. She says: “You will find that all sort of investors from DFMs to hedge funds have been doing this for a while with 20% plus in their portfolios in cash. These figures may show the wider audience catching up.”

Looking at the UK, she says: “There is no political stability in our market. It has taken 12 months for everyone to realise we have had a false sense of euphoria. We took a decision about three months ago to reposition our portfolios completely, with quite a conservative stance. We may miss out a little bit, but that is a price worth paying. 

“It is going to be a very volatile period - an eventful couple of years. However, we wouldn’t come out of equity income. It has always been a stalwart and we would discourage a mass sale and take some profits, because that could be your exposure to the UK. It is all about the total return.”

Matthew Hoggarth, an investment analyst at Thesis Asset Management, says: “The inflows to equities were slower than in March and April, but still above the average over the last six months. Fixed interest funds did see a higher inflow in May than they had in April, when the Sterling Corporate Bond sector saw a net outflow. The overall figure for May isn't massively different from the inflows in February and March though.

“We see both equities and bonds as quite fully valued. The difference is that bonds have more asymmetrical prospects. Yields are low and further capital gains are limited, however losses could be significant if interest rates rise substantially. Sovereign yields have been very low, credit spreads are at historically tight levels and there is just very little meat left on the bone. 

“Expectations of tighter monetary policy following recent comments from central bankers have raised yields, but not by enough to tempt us to increase the bond allocations in our portfolios.

“Meanwhile equities are certainly not cheap, but for investors who can stomach the potential for setbacks in the short to medium term, they can offer more attractive dividend yields together with the prospect of long-term capital growth."

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