The rise of government bond yields has increased the risk of market turbulence, Legal & General Investment Management warns.
At 11 July’s fundamentals briefing, Legal & General investment strategist James Carrick says government bond yields rose above the long-run rate of economic return in the developed world for the first time since 1999, adding to market instability.
Legal & General says in the absence of any financial market shock, global growth is expected to continue to be steady, sustained by roaring emerging markets and compressed credit spreads.
But it says credit markets fundamentals are deteriorating; risk-free rates are rising as governments try to slow economies and corporate debt is climbing rapidly.
It also noted profits should be harder to attain, as rising resource utilisation rates amplify commodities, capital equipment and labour prices.
"In recent years, a combination of low interest rates, ample spare capacity and strong growth have boosted a wide variety of asset classes,” Carrick says.
“But investors need to be more choosy now as interest rates have risen to levels that have historically created turbulence.
“In this environment we favour equities over credit, large cap stocks over small caps, resources stocks over financials and growth stocks over those paying high dividends.”
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