Still waiting for the great rotation – The TRADE poll

The long-forecast “great rotation” of assets away from fixed income and into equities may still be a little way off, according to respondents to July poll.

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The long-forecast “great rotation” of assets away from fixed income and into equities may still be a little way off, according to respondents to July poll.

The results of the poll show that almost half of respondents believe the great rotation is yet to begin despite the major market moving effects of recent central bank announcements. Readers of believe the ‘tapering’ of QE is less a winding-down than a marginal downsizing, and governments will continue to prop up the bond markets for some time to come.

While activity in equity markets has been picking up for some time, recent data from Thomson Reuters’ Equity Market Share Reporter indicates that equity market volumes have climbed over the past twelve months. In the US, total market volume was US$1.03 trillion in July 2013, up a respectable 9.7% but by no means a seismic shift in behaviour and volumes still remain depressed compared to pre-crash levels.

Anecdotally, asset managers also seem to be favouring the prospects for equities. Mark Burgess, chief investment officer at Threadneedle Investments, said: “At the asset allocation level, we are still positive on equities. Despite slow economic growth, corporate profits will still grow, sustaining dividend yields of around 3-4% and dividend growth of 5-6%. We think the search for yield will continue, given the low-interest-rate world.” He pointed to the US as an area where inflation was still relatively low considering its positive economic performance.

Another telling sign that equities might be back in fashion is activity in the ETF market. The SPDR S&P 500 ETF, the most traded instrument in the world and one of the main ways investors seek to gain broad exposure to the equity market, saw over $11bn of inflows in July according to data from ETF analytics provider IndexUniverse. Poll respondents evidently believe there is some truth that equity market conditions are improving, with 24% saying they expect improved liquidity and lower trading costs in equities.

Almost 18% of respondents are expecting credit derivatives to be more widely used. With the prospect of no longer being able to sell-on bonds to central banks and the more distant expectation of higher interest rates, credit has become decidedly more risky and with risk comes the need to hedge.

Recent evidence seems to suggest that credit derivatives are being more widely used. Derivatives exchange operator CME Group reported increased trading of interest rate derivatives and CEO Phupinder Gill said: "During the [second] quarter, our interest rates complex performed extremely well, with June volumes up 70 percent from the prior June.”

Lastly, many have also forecast a decline in emerging market ETF activity as investors shift their cash back into equities in the developed world. While there has been heightened volatility in this market segment since Federal Reserve chairman, Ben Bernanke, first announced he would begin to taper quantitative easing, many readers of do not expect this to be a major factor, with only 14% saying this will be the biggest impact. While the end of quantitative easing may have some effect, there is evidence that the broader macro-economic trend of declining developing world growth could be a bigger factor impacting the emerging markets.