Freddy Barker asks Willem Sels at HSBC Private Bank why people are moving out of bonds and into equities
Amid the Great Rotation — the move out of bonds and into equities — UHNWs are confronted with an ever-increasing stream of equity market analyses. Unfortunately these miss half the story – the bond market’s fate – and so a crisp assessment of the out-of-fashion asset class is needed.
Enter Willem Sels at HSBC Private Bank. Initially the problem facing bonds was twofold, says the UK Head of Investment Strategy: first, interest rates had fallen to levels that made them unattractive to hold; second, poor return expectations meant that bonds lost much of their diversification power too.
But since late 2012, Sels says, the challenge has evolved. Bond markets are now more volatile, and rising interest rates threaten price losses, which may wipe out additional earned income.
This is not positive given that HSBC Private Bank predicts that interest rates will continue to rise on the back of improving risk appetite, lower global economic tail risks and falling demand for safe haven assets.
‘We do not want to be alarmist,’ Sels says. ‘Central banks are unlikely to let yields spike very far in the short term as it could endanger the economic recovery. Instead, they will try to manage a gradual rise in yields and are more likely to be too slow to tighten policy than too fast.’
Over the next 12 months, HSBC Private Bank believes that this will result in Treasury returns close to zero for much of the maturity spectrum; a scenario that gives fuller perspective to the Great Rotation and will comfort the equity bulls yet more.
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