Movement into equities just the tip of the iceberg
Investors are moving capital from fixed income to equities but it will occur at a "glacial pace", according to Andrew Milligan from Standard Life Investments.
Milligan said 15 per cent of central banks had cut interest rates, which was having a positive effect on corporate earnings.
Milligan said a stronger corporate sector and improving global confidence will slowly see investors return to equities and move out of fixed income assets, but it would occur slowly.
"There are some interesting drivers supporting the equity market, of which the desire for yield is the most obvious, but I do think the rotation that we see will be glacial, gingerly, gradual rather than anything very pronounced," he said.
Equities would benefit from positive free cash flow, high dividend yields and solid company balance sheets over the course of 2013, he said.
Additionally, pressure on bond and credit values could come from higher government bond yields off the back of data pointing to a sustained global recovery and quantitative easing, which would encourage fixed income outflows.
Although governments around the world have encouraged pension schemes and superannuation funds to hoard fixed income, Milligan said they were coming around to the need to implement policies which encouraged investment into economic growth.
"For a lot of structural reasons pensions funds and insurance companies around the world are very much being told by the regulator ‘you've got to keep lots of fixed income', so this sharp move out of income assets to equity assets doesn't make sense," he said.
He said the global business cycle had moved into a "soft patch" that would take a while to deal with, as governments took action with regard to their national economies.
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