Coutts & Co., the wealth management unit of Royal Bank of Scotland Group Plc, is advising clients to shift from bonds into equities amid tumbling yields.
“The bond market looks like a big bubble,” Gary Dugan, chief investment officer for the bank in Asia and the Middle East, said in an interview today. “There are all the hallmarks of this being total over-exuberance in an asset class.”
Yields on emerging market debt tumbled 140 basis points, or 1.4 percentage points, to an all-time low of 4.44 percent on Oct. 12, according to the JPMorgan Chase & Co.’s EMBI Global Diversified Blended Yield index. The MSCI Emerging Markets Index gained 9 percent so far this year, compared with an advance of 11 percent for the MSCI World Index of developed global markets.
“You’ve got to say that the absolute levels of yields are inappropriately low and they’re largely a reflection of a one-way bet that retail and central banks have been making on bond markets,” Dugan said from Dubai. “People don’t even look at the name any more, they just look at the yield.”
Coutts, which counts Queen Elizabeth II among its clients, “is moving slowly out of bonds and into equity,” said Dugan, hired from Dubai-based Emirates NBD in July. The bank, which manages money for wealthy individuals including billionaires, is advising clients to buy equities on “weak” days where there is negative news on the Eurozone and Spain, he said.
European leaders meet this week as Greece seeks to justify renewed aid and Spain holds out on tapping a bailout. The yield on Spanish 10-year bonds dropped 20 basis points to 5.625 percent in three days through Oct. 12.
“I think the greatest risk over the next 12 months is that people are going to lose money on bonds,” Dugan said. “There’s a huge wave of capital going in at the top of the market.”
Over the past three years, approximately $1 trillion has been invested into bond markets, while about $300 billion has come out of equity markets, Dugan said. Reinvesting some of that back into equities would cause markets to rally, he said.
“Even just a modest adjustment of that you’d have equity markets spiking higher,” he said.