The debate about “fake news” has gripped politics since the election of Donald Trump in November and has entered markets as investors spar over a “great rotation” from bonds into stocks.
Long predicted by some analysts, expectations of a pronounced rotation out of low-yielding bonds and defensive share sectors into areas of the equity market that prosper from faster economic growth have been heightened by the prospect of the so-called “Trumpflation” trade.
Like many arguments about “fake news”, there is evidence to support both sides.
In the two months following Trump’s election win, $41.5bn was pulled out of bond funds, the largest redemptions since the taper tantrum of 2013, according to Bank of America Merrill Lynch.
In the same period, the bank said in a recent note, almost $70bn flowed into US equity funds, as expectations of higher growth and inflation hurt bond prices.
Not so fast say others. Analysts at Goldman Sachs likened chatter about a lasting rotation out of bonds and into equities to the “misinformation, half-truths, and political spin” seen during the 2016 US presidential election.
In a note this week “Debunking the ‘fake news’ of the imminent great rotation from bonds to stocks”, David Kostin, the bank’s chief US equity strategist, said: “The political rotation occurring in Washington DC will not be mirrored in financial portfolios,” arguing that too many holders of US debt are constrained as to what assets they can own.
Those that have more flexibility, such as pension funds and households, already “have debt allocations that are currently at the lowest level in 30 years”, Mr Kostin writes.
The argument does not convince Jim Tierney, chief investment officer of AllianceBernstein’s US concentrated growth fund, who says a rotation from bonds into equities has been “long overdue for two or three years”.
“I think if we get into an economic environment or scenario where investors have an expectation of low to no returns for a prolonged period of time, the vast majority of investors will find a way to get out of that asset class,” he says.
| Davos Man (2009-16) | Joe Six-Pack 2017 onward) |
|---|---|
| Secular stagnation | Cyclical recovery |
| Deflation | Inflation |
| Central bank omnipotence | Central bank impotence |
| Fiscal austerity | Fiscal stimulus |
| Regulation | Deregulation |
| Great Repression | Great Rotation |
| Globalisation | Isolationism |
| Wall Street | Main Street |
| ZIRP winners | Fiscal winners |
| Bonds | Commodities |
| Growth | Value |
| Large-cap | Small-cap |
| US | Japan |
| Technology | Banks |
| Passive | Active |
| Financial assets | Real assets |
| Source: BofA Merrill Lynch Global Investment Strategy | |
The question now, he says, is whether or not Trump and the Republican-controlled Congress can deliver on investors’ expectations for tax cuts, deregulation and higher growth. With confirmation hearings for Trump’s cabinet appointments having started this week, investors are on the lookout for any signs that the president-elect will have a fractious relationship with Republicans in Congress.
“You’re hearing about a little bit of infighting, so investors are reassessing and thinking it won’t be as smooth a ride as we thought,” he says.
Indeed bond funds saw their strongest inflows in three months last week, according to Bank of America Merrill Lynch.
Michael Hartnett, chief investment strategist at the bank, says the big positioning shifts will not happen until “the Fed’s become more hawkish and the economy has shrugged its shoulders”.
He points to the extreme facts of economic conditions in recent history, noting $1.5tn of inflows to bond funds over the past 10 years, the lowest global interest rates in thousands of years, and, in particular, the moment last July when yields on even the 50-year Swiss government bond went below zero.
“Perhaps -0.035 per cent on a 50-year Swiss bond was an undershoot and will be corrected more violently than people give credit for in the early part of this year,” he said.
The result of this swing back from such extreme positions, he argues in a note this week, is that the shift from “Davos Man” to “Joe Six-Pack”, from secular stagnation, deflation and globalisation into growth, inflation and isolationism will be “violent, extreme and ultimately overshoot”.
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