Domestic stock funds garnered a whopping $21 billion in the
initial four weeks of 2013, according to Lipper. This was the
best four week period for inflows since early 2000 and caused
analysts to debate the issue of a 'mini' or 'great rotation' from
bonds to stocks. Market mavens therefore wonder if we are at the
verge of a landmark inflection point. Even if we are not, the
Great Rotation has an element of truth.
A scenario of outflow from the traditional bond market into
the stock market is not difficult to conjure. Bond prices have
reached the stratosphere thereby no longer compensating owners
adequately. It is feared that to extrapolate the generous bond
returns from the past three decades into the future may smack of
hallucination. In contrast, equities are available at reasonable
P/E multiples in line with historical norms and offer compelling
value despite the run up in prices since The Great
However, rather than money solely flowing from bonds to
stocks, money moving into the stock market appears to be coming
from cash on the sidelines (and money market funds), hedge funds
as well as new money earned by individuals. Investors are also
rotating funds from the European bourses to the domestic
Multiple factors point to concurrent inflows into both stocks
and bonds rather than a sole bond outflow/ equity inflow
situation. Firstly, as millions of baby boomers near retirement
age they will likely place a heavier emphasis on fixed income
securities. Overall, they may be expected to hold diversified
positions including both stocks and bonds, but probably weighted
in favor of bonds.
Their behavior in turn, influences pension fund managers and
annuity managers who become less supportive of a Great Rotation
from bonds to stocks. Equity exposure at pension funds and
endowments are at low levels in the U.K. and U.S. as these
institutions favored bonds during the last few years. In this
regard, bookkeeping rules and regulations in the U.S. and
solvency requirements in Europe encourage pension funds and
insurance companies to hold bonds.
Even if the bond market was to take a hit and Treasury yields
rise, it may still not be reason for systematic outflows from
bonds to stocks. Instead, investors could plausibly be expected
to buy on dips and take fresh bond positions through dollar cost
In the end, pundits suggest that investors consider a
continuum of stock and bonds to derive the best combination of
liquidity, safety, returns and diversification. A mixture of
stocks and bonds has beaten 100% stock index funds in several of
the past few years.
To the extent there is a migration from bonds to stocks that
money may flow into defensive equity sectors such as consumer
staples, utilities and pharmaceuticals. Some prospective plays
Procter & Gamble Co.
Johnson & Johnson
Merck & Co. Inc.
Eli Lilly and Company
American Electric Power Co., Inc.
The AES Corporation
). A dividend stream in some of these companies may offer a
stable income besides the possibility of capital
AMER ELEC PWR (AEP): Free Stock Analysis
AES CORP (AES): Free Stock Analysis Report
COLGATE PALMOLI (CL): Free Stock Analysis
JOHNSON & JOHNS (JNJ): Free Stock Analysis
LILLY ELI & CO (LLY): Free Stock Analysis
MERCK & CO INC (MRK): Free Stock Analysis
PROCTER & GAMBL (PG): Free Stock Analysis
AT&T INC (T): Free Stock Analysis Report
UNILEVER PLC (UL): Free Stock Analysis Report
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