In its latest global outlook report Standard Life Investments (SLI) highlights how, despite the good outperformance of the equity markets, investors have not yet adopted a bull market behaviour.
“Our expectation is that equities can continue to outperform cash or bonds over the foreseeable future, implying that the bull market will continue over the next few years,” said Richard Bannit, global investment strategist at SLI. “ By the end of this year we should have three years of equities outperforming all other asset classes and then maybe people will start seeing this as a more sustainable bull market and get more recommendations favouring the equity asset class.”
Over the last few years, investors have been advised to find alpha outside the equity markets with fixed income and alternative investments gaining ground within investment portfolios.
Philip Saunders, head of strategy at Investec Asset Management, agreed on the need for greater portfolio diversification but criticised the industry for not having been able to handle the bear market in a better manner. “This industry is wonderful at fighting yesterday’s battles and this time is no exception with advisers effectively saying ‘sell equities, buy bonds and alternative assets’.” He said that in retrospective the timing was dreadful since the bear market was quite mature and the scope for earnings recovery was significant.
It is unlikely that investors make radical changes in their current asset allocation as a consequence of strong returns in equities, since their long-term liabilities and the losses suffered at the beginning of the decade mean they cannot afford to get it wrong.
Richard Lacaille, chief investment officer Europe at State Street Global Advisors, commented: “The question from a strategic point of view is whether some of these investors can take the risk of being wrong and suffer when their liabilities continue to increase and their assets decline. Many of our clients still need to find ways of hedging themselves in terms of their fixed income exposure where they have very long-dated liabilities, and somehow manage down their exposure to equities in a way that is affordable.”
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