Hunting for evidence of the ‘Great Rotation’
Whether or not investors are shifting from bonds to equities is open to debate, but the signs are that wealthy clients are ready to rebalance their portfolios
The ‘Great Rotation’ – a phrase from Wall Street to describe the expected shift of portfolios from low-yielding bonds to stocks with prospects – is either real or imaginary, depending on whom you talk to.
It is a theme US bankers, including JP Morgan and BNY Mellon, have been promoting since last summer. Their clients have been reluctant to go with the flow, even though excessive fixed income holdings are beginning to damage their wealth.
According to Schroders, the rotation is already happening although Luxembourg, domicile of choice for European cross-border fund providers, offers scant evidence of a serious trend digging in.
This year, according to Luxembourg funds association Alfi, equity net inflows – after a bond-crazy 2012 – are nudging ahead of fixed income fund sales. But a co-ordinated switch from one to the next is still wishful thinking.
European banks such as Unicredit and UBP see GR talk as not standing up to rational analysis and premature at best. But plenty of commentators believe sentiment is so fickle, that a little nudge could see the wheel start to spin.
Indeed certain European – as well as US – stocks offer genuine value, and with institutions so highly overweight bonds for the first time in years, the contrarian trade could prove a winner for wealthy clients, say strategists at German boutique Berenberg.
Banks such as France’s BNP Paribas and family-run boutiques like Reyl & Cie in Geneva appear to be keeping faith in high-yielding equities Nestlé, Swatch and Novartis, which also derive significant revenues from emerging markets. Yet historical 10 per cent yields at Nestlé are likely to halve and banks are beginning to include one or two more aggressive names in client portfolios.
Adding shares such as miner Rio Tinto seems to suggest a broader switch away from defensive telecoms and utlilities to a more adventurous outlook related to a new cycle.
Threat of inflation
That changing tide will inevitably bring inflation. One of the few ways to protect against this threat is diversification of assets. For most private bankers, inflation is fast moving to top of the list in client conversations.
Whether it is at ABN Amro in Amsterdam, Julius Baer and UBS in Zurich, or Lombard Odier in Geneva, chief investment officers are putting forward both equities and real assets to protect purchasing power.
But while risks of eurozone disintegration have faded, they have not gone away. Scary stories are coming from Cyprus, where a banking system dwarfing the island economy may collapse unless bailed out by a tax on depositors or a cash injection from Russians with ulterior motives.
That said, potential for an authentic, rather than mythical GR to take place is real, says Yves Bonzon, chief investment officer at Pictet. The Geneva firm is steadily increasing allocations to dollar assets, particularly equities, hedge funds and high yield bonds.
Rather than resisting the urge to rotate, Swiss clients are less keen to part with gold, which many have been holding as a counter-weight to economic desperation. As we see a light at the end of the tunnel, the rationale for a 20 per cent golden allocation begins to fade.
Swiss clients are not as conservative as we think, believes Mr Bonzon, pleasantly surprised at positive customer reactions to the bank ditching its anachronistic unlimited partnership structure.
If clients are prepared to accept a wholesale change in the very nature of private banking with something approaching equanimity, a comparatively short step towards more realistic portfolio holdings along the road to GR should be relatively easy.
