Photo: Bloomberg Markets 50
Citi’s Tobias Levkovich is one of the more bullish strategists on the Street when it comes to where the stock market is headed from here. In fact, he thinks we’re on the verge of a big, secular bull market (he calls it the “Resurgent Raging Bull” thesis).However, even though Levkovich is bullish, he says a “Great Rotation” scenario that many envision in 2013 – wherein investors pull money from bond funds and “rotate” it into equities – is probably over a year away.
Contrast with BofA strategists, who say the “Great Rotation” has already arrived.
In his latest note to clients, Levkovich writes that the data on equity flows so far in January that has been driving the buzz about the “Great Rotation” doesn’t really paint that clear of a picture:
In addition, a so-called Great Rotation towards stocks has not developed from the evidence that can be compiled recently. The data on US equity mutual fund flows have been mixed based on different tracking sources. Indeed, one mutual fund flow data provider reported outflows during January while others suggested there were significant weekly inflows.
Furthermore, though many are talking about a “1994 scenario” – a mad rush for the exits in the bond market – Levkovich doesn’t really think that is plausible.
Investors usually take a longer view, writes Levkovich, and that means a big rotation out of bonds may not happen for another year:
Note, we suspect that investors will need to be convinced by five-year return numbers showing equities outperforming bonds and that means it may take another year for the rotation to develop (since the tough 1Q09 will have to be “anniversaried” away).
We have heard some suggest that individual investors will exit the fixed income asset class once bond funds suffer losses, but we would remind readers that the tech bubble peaked in March 2000 and aggressive growth funds only began to witness consistent outflows in mid-2002; a full 26 months later.
Hence, at the first sign of bond fund losses, we deem it doubtful that people will immediately give up on a 30-year bond rally. We would further highlight that our survey in early January showed institutional clients actually raised their cash position as a per cent of assets under management despite the market’s appreciation since last summer.
Of course, there are other factors that don’t have to do with rotations that underpin Citi’s bullish thesis. Levkovich writes:
Moreover, household deposits nearly have doubled in the past decade to almost $9 trillion (see Figure 4), currently earning a negative real yield, which provides a flood of new money flow potential that has yet to develop. And, corporate balance sheets are in fine shape with substantial cash positions that can be deployed. Thus, one easily can contend that there is lots of dry powder on the sidelines that can make its way into the stock market if confidence in the economy and government recovers.
However, Levkovich, echoing many others, says investors should be cautious in the near term after the recent runup in stocks.
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