Recent entries into passive ETF equity funds from global investors have been sizeable relative to bonds, suggesting a rotation in the market, according to Goldman Sachs Asset Management (GSAM).
Equity risk premia (ERP) remains high in most markets whilst interest rates continue to be low. Combined with other positive lead indicators this suggests that it is increasingly dangerous for investors to be heavily invested in government bonds in the US and elsewhere.
“[This] raises the possibility that investors are starting to switch back from bonds to equities,” GSAM chairman Jim O’Neil said.
“We do not observe strong signs of this happening. However, given it is [early] January, it is unlikely many cautious long-term investors would be making such decisions so quickly [after the New Year].
“What is clear from the reported weekly ETF data is the recent inflows into passive ETF equity funds have been quite sizeable relative to bonds,” he said.
Mr O’Neil also explained there are a number of growing hints in the market that the post-2008 environment of ‘risk on/risk off’ with strong cross-asset-class correlations is reversing.
“It should be really good for specific investors who can concentrate on their asset class and not worry so much about extraneous forces,” he said.
GSAM calculates that although current US equities are not cheap, it is conceivable that they could become more expensive again if the rotation from bonds to equities continues.
“And moreover, many markets around the world remain quite cheap on a cyclically adjusted PE ratios (CAPE) basis, whether it be Japan, much of Europe and, of course, the wonderful world of the growth markets, and a number of emerging markets as well,” he said.
