Bonds may seem attractive in a bear market but shares will have better risk premiums for the next ten years, AMP head of investment strategy Shane Oliver said in a report.
With the flight to what are often perceived as “safe assets”, Oliver has warned investors to reassess their investment strategies moving forward.
“Thanks to current low government bond yields and higher dividend yields on shares, shares should provide a good risk premium over bonds for the decade ahead,” Oliver said.
He argues that while many analysts tend to focus on past data to predict return premium trends, this approach has its limitations and does not provide a definitive guide as to what the equity risk premium should or will be.
Equity risk premium, defined as the excess return that shares provide over a “risk free” asset like government bonds, was charted over the last 60 years in the report.
It showed a mean reversion where decades of high excess returns from shares followed decades of low returns and vice versa.
Therefore, Oliver argues, the poor performance of shares versus bonds through the last decade suggests a good chance of shares outperforming bonds over the decade ahead.
Furthermore, bond yields now face the risk of rising towards more normal levels as central banks raise interest rates and inflation increases in the next few years.
This will result in capital losses on government bond investments and hence potentially higher excess return from shares over bonds.
“While stocks are vulnerable to a correction after their sharp gains in March, any short-term pull back in shares will simply be a correction in a still rising trend,” Oliver said.
