Presenting, a public plea to portfolio managers from Kit Juckes, head of currency strategy at SocGen (our emphasis):
I’ve attached a piece on month-end flows and pension re-balancing which hit my inbox from our US equity derivs folks last night. The analysis is excellent, which I want to stress before going on to say that the outcome is deeply depressing.
What the piece points out is that the massive out-performance of equities vs bonds in 2012 will lead to automatic portfolio re-balancing as pension funds try not to have ‘too many’ equities relative to their benchmarks and agreed asset allocation.
I don’t doubt that there will be pressure for these flows to happen and if they are as big as suggested (up to USD 30bn) maybe that will cause a hiccup for the SPX and for risk appetite more widely. Momentum indicators have been warning the bill market’s going too far too fast for a while.
But can I please ask whoever runs my pension pot NOT to asset allocate me out of equities just, now, thanks? We live in a ZIRP world, highlighted by the BOJ telling us they will keep rates at zero until inflation’s back at 1%, something which it hasn’t managed (ex the artificial blip caused by hiking consumption tax) for 19 years.
On this basis, the BOJ will have zero rates even after the Fed and ECB have started hiking.
Bond markets have slowly and steadily embraced the notion of really low rates for a really long time, and they have accumulated strong returns on the way. that’s lovely. But from here, bond market returns are about as attractive as following a plague of locusts across a field of corn.
You’re not going to get rich buying 2yr Notes at 0.3% yields (indeed, you’re just going to guarantee to get a bit poorer) and I don’t think you’re going to achieve much if you picked up 0.25% yields in this morning’s 2yr Schatz, either. But if the US economic thaw continues, and if we retain ZIRP, and if the UK adds another GBP 25bn to its bond-buying for good luck, and if the BOJ’s change of stance is indicative of a bigger mood shift, we could be on the verge of a longer bull market in equities, irrespective of the need for short-term corrections.
So…. pension fund manager, please don’t buy me any bonds, unless they’re corporate bonds.
None of that govt, ZIRP nonsense, thanks, though I might consider Thai bonds, and help post-flood rebuild….. at least I get 4% yields on those and own a cheap currency…
Kit Juckes
We’re hearing you Kit. Loud and clear.
Related links:
Rally Monkey gets sucked into the self-referential vortex of psychologically important thresholds – FT Alphaville
The Gross paranormal, a.k.a the time depreciation of money - FT Alphaville