The term ‘Great Rotation’ was coined first all the way back in January 2011 Bank of America Merrill Lynch analysts. They predicted low bond yields compared to relatively attractive equity valuations would soon trigger a massive investor rotation from bonds to equities. This so far has not happened, but Donald Trump’s election to the US presidency seems to have pulled a trigger.
The week to 16 November saw the biggest equity inflows in two years at $28bn (€24.6bn) and the biggest bond outflows in more than three years at $18 billion, according to BofA Merrill Lynch. This is the widest weekly disparity between stock and bond flows ever.
However, fund managers speaking at the Expert Investor Finland forum last week in Helsinki don’t see a structural Great Rotation happening. The main reason for that is the fact that the growing number of pensioners is enforcing another great rotation, from equities to bonds, said AXA IM’s Jonathan Baltora, who admittedly manages a bond fund.
“Ageing is a structural trend. And as people retire, you will gradually see a rotation from 50-50 balanced portfolios to portfolios with only bonds. That’s the secular trend,” he said. “Maybe we could see a tactical rotation, but on the longer term bonds are very well supported.”
Fiscal spending - a force for good or for bad?
And ironically, the main reason bond yields have been under upward pressure recently is the promise of fiscal easing. If a government’s fiscal position deteriorates, investors will demand a higher risk premium driving bond yields up. “But, if we get fiscal spending, this will be financed by governments issuing more bonds,” Baltora noted. And those bonds will be bought by investors.
However, a different kind of rotation is still on the cards, said Michael Craig, manager of the Invesco European Senior Loan Fund. “I’m talking about a little rather than a great rotation. Investors we are speaking to rotate within fixed income. They need returns of 4-6% that they can’t really get from traditional bonds. So they are rotating into alternatives within fixed income.”
Illiquid credit, Craig’s asset class, is indeed in demand across among fund buyers who are prepared to sacrifice liquidity for extra returns. According to Expert Investor data, more than a third of fund buyers in the Netherlands and the Nordics plan to increase their allocation to illiquid credit.
Click here to see a slideshow of photos taken at Expert Investor Finland.