The bear market experienced by equities over the past three years has resulted in a massive flow of ...
The bear market experienced by equities over the past three years has resulted in a massive flow of assets into government and corporate bonds.
Although some of this has been from private investors, the majority has been from institutions, particularly insurers and pension funds scaling back their exposure to equities.
This has led to a derating of equities relative to bonds and has seen traditional comparisons between the two asset classes revert to levels not seen for 40 years. Private investors and their advisers are unsure whether to back bonds or equities in the current Isa season and the rest of 2003.
There is a feeling in some camps the cheapness of equities relative to bonds presents a significant buying opportunity. These people argue that bonds have become overpriced to a level that should keep investors away.
Granted, bond yields in the UK are close to historic 40-year lows but which way things go from here depends largely on the outlook for global growth.
The possibility of a war in Iraq casts a shadow of uncertainty over world economies and has resulted in a real feeling of stagnation. Business investment decisions in all corners of the globe are being delayed and consumer confidence continues to suffer.
However, the economic picture in the US is not as bad as the mood suggests. Alan Greenspan and George Bush have done their bit and although the tide has not turned as some would have hoped, the building blocks for growth are in place and there is already the odd glimmer of hope.
Europe, on the other hand, seems more of a serious problem with, worryingly, its biggest player, Germany, in the most trouble.
There is no love lost between the US and core Europe and, although the full implications of this are still to emerge, the danger is the US will become more protectionist. We expect to see the growth differential between the US and Europe begin to widen once again, which may stop the dollar weakening against the euro.
In the UK, the Government's luck would seem to be on the turn. Blair's popularity is waning and Brown's run has also come to an end.
The real risk to the UK economy is still the housing market but we remain relatively sanguine in this area. London is the exception and could see further losses but the regions should be well supported unless unemployment increases, something we don't see as a material threat given the government's moves to fill public sector vacancies.
Government spending will continue as the principal swing factor of economic activity during 2003, the consequence of which will be rising government bond issuance.
Despite a desire to de-leverage, we expect corporate issuance in the coming year to remain high, as a significant amount of refinancing becomes due and several large infrastructure programmes come to market.
We believe the structural demand for corporate bonds from pension funds remains strong and should help offset some of the upward pressure on yields brought about by increased supply.
Demand for corporate bonds remains strong.
US building blocks for growth are in place.
Issuance in UK should remain high.
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