Investors Urged to Look Into Equities

on Oct 8, 2012

On 7 October 2012, The Sunday Times reported that investors were being urged to back equities with sales plunging to their lowest levels since the credit crunch. Meanwhile, experts have been growing increasingly bullish on developed market shares, as some expect a sharp-sell off in bonds in the coming months.

The Sunday Times quotes the August investment fund statistics of the Investment Management Association (IMA) which showed that retail sales of investment funds totalled just £23.2 million in August relative to £1.2 billion in August 2011. In addition, the result marks the lowest net monthly inflow since October 2008. Equity funds in particular saw a net outflow of £604 million, the biggest outflow since November 2011. The worst-selling sector was UK All Companies, where the net outflow amounted to £401 million, the highest outflow since January 2008.

By contrast, fixed-income investments, such as corporate bonds, have been the best-selling sectors for nine consecutive months. “The fixed income sectors and asset class continue to attract the highest net retail sales,” noted IMA’s Chief Executive Richard Saunders in an IMA press release. The Financial Times recently reported that the observed investor trend was not limited to the UK, with similar investment patterns also being observed in Europe and the US. “Many investors are put off by equity market volatility but feel they should not be sitting on cash deposits,” notes John Chatfield-Roberts, head of the Jupiter Independent Funds Team, as quoted by the FT.

!m[Experts Turn Positive On Shares, Express Concern About Bonds](/uploads/story/541/thumbs/pic1_inline.png)And while investors seem to be moving away from the sector, experts recommend higher exposure to equities. The Sunday Times reports that Psigma Investment Management for instance recently increased its forecast for developed market equity returns from 8 percent to 8.4 percent over five years. Barclays (LON:BARC) in turn noted that investors with a moderate risk profile should hold 38 percent in the developed market equities sector, an increase from 35 percent. Barclays also identified a basket of European stocks worth buying, including the French infrastructure company Alstom (EPA:ALO)and the French utility Veolia Environnement (PINK:VEOEF).

The FT quotes Willem Sels, head of investment strategy at HSBC Private Bank as saying that he had become more optimistic on equities, believing that they remained compelling relative to history and compared with bonds. “The valuation gap between bonds and equities has been high for a while without investors making the switch, largely because bonds continued to rally and equities remained volatile,” noted Mr Sels, adding that his company believed cross-asset flows would start to occur, “as equity momentum improves and the safe haven bond rally peters out.”

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Inflation is seen as the major threat to bond returns, with the European Central Bank and the US Federal Reserve announcing open-ended quantitative easing programmes. “Investors are playing a dangerous game,” notes James Maltin at the wealth and investment management company Rathbone Brothers (LON:RAT), as quoted by The Sunday Times. “Those buying bonds today run the risk of diminishing the purchasing power of their capital because returns simply aren’t beating inflation.”

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