A Great Rotation, or not?

The media is awash with reports that a rush into stocks by investors has begun a great rotation out of bonds into equities. Yet other reports are emerging that question the premise of a direct relationship between the demand for bonds and equities. Although January’s flows into equities have been strong, flows into bonds have also continued their strong pace.

January is seasonally a strong month for the stock markets. In the US for example similar flows were seen in 2006 and 2011, but were not maintained over the rest of the year. This year’s strong flows were due to a variety of reasons such as large amounts of special dividends issued in December 2012 that needed to be reinvested, and an easing of selling pressure after the year-end selling of stocks to realise tax losses before the new tax year. Additionally, there is evidence that money that was invested in the money markets because of the US budget uncertainty has flowed into stocks in January.

That said, this does not represent a bearish view on equities, which have done very well in recent years. Since 28 February 2009 the FTSE All-Share, the S&P 500 and the MSCI World indices have returned 94.7%, 121.2% and 107.7% respectively despite the huge outflows*. Improving risk appetite and cheap equity valuations are reasons for an upbeat outlook for equities. However, although the great rotation might occur at some point in the future, it is too simplistic a view to claim it has begun now.

*Source: Thomson Reuters Datastream, total returns, local currency to 4 February 2013.