UK Corporate bonds have easily outperformed UK equities in the past decade, but the relative prices ...
UK Corporate bonds have easily outperformed UK equities in the past decade, but the relative prices paid to acquire the different asset classes at present mean that investors who skip over boosting their equity holdings will be "looking a gift bourse in the mouth", according to the latest annual Barclays Equity Gilt Study.
Since 1992, corporate bonds have provided 8.6% real returns compared to 3.9% from equities – including a loss of –24.5% last year alone, the study says - driven in part by an increasing switch away from equities by life companies.
As institutions look away from stock markets, the question increasingly becomes one of who will replace their demand for stocks.
Private investors are likely to step into the space, Barclays says, because they will be attracted back by ongoing good corporate earnings, increasing M&A activity and an increasing number of share buy-back schemes.
In fact, the study says, corporate earnings in both the UK and US were up last year according to tax returns, and with little incentive to reinvest profits through capital expenditure because of weak business confidence, that cash will be directed elsewhere, including into the pockets of shareholders.
Private investors have also learned a valuable lesson in the past three years, the study says, which will encourage their re-entry into the stock market.
The lesson is: only play with money that the investor can afford to lose.
As pension funds switch towards bonds for security, private investors will increasingly realise that they can play with "risk capital" on the stock market, in the knowledge that their "life-critical funds" are being left well alone.
Barclays' house view also continues to place inflation-linked bonds "at the heart of the investment process" because they eliminate the inflation risk, which is a major part of the overall element of risk attached to any investment.
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