Merrill Lynch's chief investment officer Bill O'Neill has advised investors to steer clear of government bonds, saying they will only offer value in a double-dip environment.
According to O'Neill, intoday's low growth and low return environment, investors will find more value in corporate bonds and equities over government bonds.
"Despite lower yields in credit, valuations are still fair, particularly for high yield. The valuation offered by equities relative to government bonds is attractive for longer term investors, however, for those with shorter time horizons, a focus on price is necessary," he said.
Within equities, O'Neill pointed to emerging markets as a sweet spot, saying they are likely to experience stronger economic growth in the coming years.
He advised investors to stick to developed market companies with high sales exposure to the emerging bloc, particularly the consumer discretionary and technology sectors. O'Neill also highlighted the US as offering a more sustainable return to better growth, and urged investors to seek out income within their equity exposure.
According to John Bilton, Merrill Lynch's multi-asset strategist, the current correlation between risk assets, stocks, corporate bonds, and commodities is unnervingly high.
"High cross asset correlations warrant strong consideration for portfolio diversification," he said.
"Longer term, portfolios should consider allocations to alternative assets, such as hedge funds, which may provide greater diversification should elevated correlations between riskier assets remain high.
Bilton also warned reduced market volatility, demonstrated by volatlitlity indices such as the VIX index, should not relax investors too much, and said a cautious stance is still necessary. Bond volatility has increased and uncertainty surrounding tensions in Iran and high crude oil prices are likely to spark higher commodity volatility.
"Selected volatility measures are low but may not remain so. Investors should not be complacent about the current respite. Use this opportunity to consider assets that typically dampen portfolio volatility - for example, the US dollar, which typically rallies in the flight to safety," he added.
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