27th November 2015
The lack of an imminent rate rise means credit is king and equities could be headed for a ‘Japan-esque’ crisis.
Gill Hutchison, head of investment research at City Financial, said that markets were in a troubling state and that it is valid to consider that equities will fail to make sustained progress for years.
‘People have been worried about mass redemptions from bond funds for a long time, in part because they probably expected a normal cyclical economic recovery, accompanied by an increase in interest rate,’ she said.
‘This has clearly not transpired and with economic data indifferent and equity markets in a nervous, bearish mode, it is difficult to see why investors would wish to abandon bonds in their droves.’
Hutchison said that even after the problems of 2008 only a small proportion of global mutual fund were actually liquidated.
‘Countering this is the argument that retail participation through bond funds and multi-asset funds is greater than it was then, thanks to our low interest rate world. How some of these investors would respond to a sustained period of negative total returns is an open question,’ she said.
‘There is no silver bullet answer to the bond liquidity problem. We all know that daily-dealing, open-ended funds are an imperfect vehicle for any asset class that experiences liquidity problems but for the majority of the time, they are a satisfactory way for retail investors to invest in an otherwise inaccessible market.’
Hutchison said the markets are in a ‘troubling’ and ‘bifurcated’ state, distorted because of monetary policy which could lead to problems for equities.
‘When contemplating the next phase, it is valid to consider the potential for a Japan-esque future, in which equities fail to make sustained progress for years and credit is the most rewarding asset class,’ she said,
‘In other words, don’t bank on a grand and seamless rotation from bonds to equities – your portfolios might still have a friend in corporate bonds.’