Volatility Will Deter Rotation Into Stocks, Kostin Says
Volatility will deter investors from moving into stocks from bonds in 2013 even as dividend returns exceed fixed-income yields, according to Goldman Sachs Group Inc.’s U.S. equity strategist.
“It’s the drawdown risk that is inhibiting investors from reducing bond holdings and increasing equity holdings,” David Kostin said at a presentation in London today. “You need to have more stable markets. I do not anticipate flows into equities from bonds. It should happen; it won’t happen this year.”
The forecast is at odds with Goldman Sachs Asset Management Chairman Jim O’Neill’s comment this year that funds may see a “great rotation” into equities. Investor deposits into global equity mutual funds in the first week of January were higher than any other period except one, a sign they may be returning to stocks after withdrawing cash for the past six years, according to data from EPFR Global.
The Standard & Poor’s 500 Index (SPX) ended last year with a dividend yield that was 56 basis points, or 0.56 percentage points, higher than the yield on the benchmark 10-year Treasury, according to Bloomberg data. The spread reached a record weekly high of 1.16 percentage points in 2009 in favor of equities.
Most investors will probably sell U.S. government bonds if losses push the 10-year Treasury yield to 3 percent from 1.85 percent currently, Kostin said today. Sustained higher yields, negative 5 percent bond returns and reduced uncertainty are needed for retail investors to change their psychology, JPMorgan Chase & Co.’s Nikolaos Panigirtzoglou said on Jan 9.
While the S&P 500 ended last year with a 13 percent gain, it fell as much as 9.9 percent in the two months starting in April. Investors had to weather a 7.7 percent decline in the equities benchmark between September and November. The index tumbled 19 percent between April 2011 and October 2011 as the U.S. lost its top credit rating.
About $22 billion flowed into equity funds around the world in the week ended Jan. 9, according to data compiled by EPFR Global going back to 1996. The MSCI All-Country World Index jumped 3.1 percent in the first week of 2013 and the S&P 500 reached a five-year high this month on signs the global economy is gaining momentum.
The flows represent a turnaround for investors who have pulled more than $600 billion from mutual funds that invest in American stocks since 2007, according to data from the Investment Company Institute. The worst financial crisis since the Great Depression and the slowest economic recovery since World War II kept individuals from buying stocks, even as the S&P 500 more than doubled since March 2009.
Investors have piled into less volatile securities during the past six years, adding more than $1.1 trillion to bond funds, based on data from Washington-based ICI. About $150 billion was withdrawn from mutual funds that invest in American stocks in 2012.
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