Institutional Investor: Investors Will Hate Stocks Next Decade, After Being Annihilated This One

Dubai Trader

Talk about a gigantic contrarian indicator — Institutional Investor (II) has declared that the equity party is over!

Institutional Investor: The equity party is over.

After a 25-year bender in which stocks catapulted Wall Street to such dizzying heights that financial firms managed to tip off a worldwide recession, the cult of equities is declining in earnest. The resulting hangover could fundamentally change the game for Wall Street.

Here are some of their key reasons why investors will err towards bonds over stocks going forward.

  • ageing investors need bonds, not stocks. “About 22 per cent of Americans, some 68 million people, will reach retirement age by 2020, and as baby boomers start drawing down their assets, they can’t risk wild fluctuations.”
  • Investors have seen too many stock crashes in the last decade. “”They’re saying, ‘We’ve seen two major market crashes in a decade, and this one is even worse than the first — and it’s not over. I’m done,'” says Harry Dent, the author of six books on the impact of an ageing population on national economies.”
  • Pensions regulation now favours bonds. “New legislation has impelled pension funds to match the duration of their assets to their liabilities, and as a consequence they are adding bonds, greatly downplaying equities and making their portfolios more conservative. The Pension Protection Act of 2006 made corporations pay stricter attention to funding and prevented them from smoothing their plans’ returns over many years. … John Haugh, an analyst from Bank of America Merrill Lynch who covers institutional investors, says this could result in $300 billion to $500 billion in U.S. pensions, endowments and foundations money flowing out of U.S. large-cap equities into international markets, alternatives and fixed income.””
  • Investors have already fled stocks. “Don Phillips, managing director of Morningstar, says the decline of equity is well under way. Bond fund flows are at record highs even as investors lower their exposure to equities.”

Great stuff, it’s just that II’s conclusion is completely backwards.

A new age of stock scepticism sounds like great news for patient buyers looking to pick up cheap stocks before they become famous.

Every single argument above is only bearish for those who follow a short-term greater fool theory to investing. While we might not be able to count on over-hyped stock bubbles anymore as much as we used to, if you buy a cheap company set to generate massive cash flow over the next five years, don’t worry, investors will eventually notice what’s going on regardless of how sceptical they initially were.

For hedge funds even, investor disinterest in stocks means that a lot of smaller companies might be very cheap, and open to shareholder activism as well. If the market doesn’t recognise your company’s cash flow as fast as you like, make the company pay out cash flow as a higher dividend. Or get your company sold to an industry player who can capture the value the market may temporarily miss.

Also, from a broader perspective, if debt is overpriced vs. stocks, it clearly benefits shareholders when one thinks about the funding of companies. Equity holders will be able to fund their companies via cheaper bonds (since bonds will be overly favoured) rather than share dilution (stocks aren’t hyped, so companies are incentived to fund a company via debt). Such a skew in investor-love for bonds vs. stocks ultimately leads to higher cash flow per share, from fewer shares and lower interest costs on debt funding. This is great if you plan to invest via equity over the next few years.

The mess of finance and investing theory can sometimes confuse us from simple truths — if you’re a future buyer, then cheaper, less hyped assets are better. Investor distate for stocks would mean a great buying environment going forward, and rather than the party being over… it would be just beginning.

Read the full Institutional Investor article here >

(Tip via Abnormal Returns)

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