Investors' are still more in love with bonds than stocks

With the stock market at all-time highs, the research team at Barclays considers what’s next.

Barclays global head of asset allocation Jim McCormick considers the performance of stocks relative to bonds.

“A key macro trend in 2015 is the outperformance of equity vs. fixed income,” Barclays Jim McCormick said in a note to clients on Thursday. “We see compelling reasons for the relative outperformance of equity to continue.”

Among other things, McCormick considers the recent history of fund flows between equity funds and bond funds since the financial crisis.

“[M]any measures of flow and positioning suggest investors have yet to catch up with the underlying improvement in relative equity performance.”

Here’s more from McCormick: “From 2009 through late 2012, bond inflows overwhelmed equity inflows despite the underlying strength in global equity markets. This then turned in early 2013, especially after Fed Chairman Bernanke’s speech in May (the mini “great rotation”, in other words). But since the start of 2014, flows have again shifted in favour of bonds, a trend that gained steam in H2 14, as fears of deflation started setting in. It is still early days, but it is notable that flows have yet to track the outperformance of equities relative to bonds so far this year — in 2013, the turn in flows actually led the fixed income sell-off.”

McCormick said his data on asset allocation in the $US2 trillion fund management industry imply exposure to stocks has fallen significantly. “The beta of their portfolio to equity markets is currently 0.55, compared with an average of 0.65 over the past 10 years. Assuming the betas are representative of equity weights, this would mean somewhere near $US100 billion of relative flows to equities just to get back to neutral.”

To be clear, just because Barclays expects stocks to outperform bonds doesn’t necessarily mean they expect stock prices to go up. Stock can just do less bad than bonds. Indeed, Barclays US equity strategist Jonathan Glionna expects the S&P 500 to end the year at 2,100, which is down slightly from the th 2,130 level we’re seeing today.

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