Japan is the natural home of the bear, but its bull market from 2003-2007 looks very like the current US bull market. James Mackintosh, investment editor, looks at the parallels and considers what’s needed to keep the bulls running.
Has the Great Rotation already started? A couple of startling data points from the last month, covering treasury yields and flows into equity funds, certainly suggest so. But the picture is maddeningly unclear under closer examination.
First, there is the treasury bond market, as discussed in last week’s video with Mike Mackenzie, before 10-year yields had risen above 2 per cent (they’re back below today). Significant rises in yields would be an obvious sign of a rotation. You can see that video, and Mike’s emphatic argument that if the equity rally makes any sense at all then the rotation out of bonds must be coming, here:
Note that even with the brief move above 2 per cent, there is still a way to go before the inexorable downward trend in yields that has now lasted more than a quarter of a century is breached.
The other obvious data to look at concerns flows into equity mutual funds and exchange-traded funds. Until very recently, the trend to pull money from equities and transfer it to stocks has continued unabated. Stephane Deo of UBS discussed this with Ralph Atkins in the Note video available here:
Again there are signs of change, but not enough to make the call that the “Great Rotation” has already begun. Most startlingly, TrimTabs, which can publish flow data quickly because it uses algorithms to derive estimated flows from funds’ performance, found that inflows to all equity mutual funds and ETFs this month have already topped $55bn. That beats the previous monthly record, set ominously in February 2000 on the eve of the dotcom crash. Read more
Investors are desperately hoping for a return to normal markets, which would mean the end of the risk-on, risk-off paradigm. Risk-on, risk-off – which sees the price of pretty much all asset classes move together – has retreated a little, but is still a force in global markets.
One example is the global flow of money out of havens. Today’s video and column highlights one aspect of that: the rise in the US bond yield above that of neighbour Canada, as investors shift from the safety of US Treasuries to prefer the growth prospects further north. Rather than going away, this is typical of the risk-on phase of the risk-on, risk-off cycle. Read more