The so-called “Great Rotation,” an anticipated global shift from bonds to stocks, may take longer than expected to happen as concerns linger over the strength of economic growth in Europe, China, and the U.S., according to Fran Rodilosso, Fixed Income Portfolio Manager at Market Vectors ETFs.
“Despite optimism on the growth front, there are still plenty of signs that growth could lag, potentially confounding the market’s expectations and slowing the pace of the much-anticipated ‘Great Rotation’ from bonds to equities during the course of 2013,” said Rodilosso. “While many economies around the world appear to be strengthening, there are still enough trouble spots, including political upheaval in Europe and an unraveling of some of the recent credit-led growth in China, to potentially undermine a wholesale movement from fixed income into equities this year. Any sort of ‘Great Rotation’ may take us into 2014 or possibly even further out on the calendar.”
“If and when inflation does return, equities may be a good bet,” Rodilosso added.
Rodilosso noted that while the long-term prospects for bonds may still be darkening, those who remain in fixed income may be well served by keeping an eye on duration as a way to mitigate risk. “While lower duration funds and instruments, including floating-rate debt funds, are not paying much yield right now, the opportunity cost for investing in these vehicles is also low, which I think makes them a potentially appealing option from a risk/reward perspective as a place to invest for modest yield or to hold in lieu of cash,” Rodilosso said.Rodilosso noted that credit risk is not currently high on his list of worries. “If economies do disappoint in the second half of this year, my concerns over credit risk may heighten,” he said. “But I am more comfortable getting extra yield through credit risk than by extending duration.”