Every risk has a price, and in our view, markets are priced for different outcomes. Strikingly, the chart of the week shows bond risk premia now exceed equity premia for the first time since the Great Financial Crisis.
The gap has only twice been this wide in the last century – during the Great Depression and the Nasdaq tech bubble. The current differential has been driven by higher long-term rates (inflation breakevens and real yields have risen) and lower earnings yields as analysts have turned more bullish on expected earnings.
Relative valuations look extreme to our multi-asset portfolio management team, presenting attractive opportunities for active asset allocation. Their key risk positions are now an overweight versus their benchmark in sovereign bonds, chiefly in the US, and a modest underweight in equities, concentrated in Europe.
Click here to read our latest Asset Allocation Monthly entitled “Complacent? Not us”.
Disclaimer
Please note that articles may contain technical language. For this reason, they may not be suitable for readers without professional investment experience. Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. This document does not constitute investment advice. The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns. Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions). Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.
