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Two stock market crashes in the past decade have many investors and institutional managers parking more of their money into government bonds -- pushing yields to record lows in recent months. The move to bonds has Citigroup strategists calling the end of a 50-year bull run in equities.
"We would love to see the cult of equity make a re-appearance soon, but are not counting on it. The 1990s represented the peak of a 50-year investor shift away from bonds to equities," Robert Buckland and other Citigroup strategists said in a recent note to clients. "At just 12-years old, the shift back the other way still looks immature."
Buckland says the clearest example that the "cult of equity" is dying is the shift by pension funds from equities to bonds.
In 1952, U.S. private sector pension funds held just 17 percent of their assets in equities, compared to 67 percent in bonds, Buckland says. By 2006, the same funds held 69 percent in equities and only 19 percent in bonds. But in the wake of the 2008-09 financial crisis, pension funds pared back their equity holdings further to just 52 percent and raised their bond assets to 35 percent.
Buckland adds that the trend towards bonds is much more noticeable in British and Japanese markets.
Retail investors have also been exiting equity markets, as money into U.S. mutual funds peaked in 2006 at $309 billion US. Investors have -- since the 2009 recovery -- moved their money to bond mutual funds.
Buckland says the biggest factor in the changing shift of attitudes comes down to returns -- or, more importantly, the shrinking return on equities in the last decade.
When the bull run in stocks began in the 1950s, U.S. equities offered an annual 17-percent real return throughout the decade, compared to negative 1.5-percent return for bonds. But times have changed. In the 2000s, equity returns averaged a negative 3.5-percent annual return, while bonds returned 4 percent.
"The best hope for those expecting the equity cult to come barreling back is probably that the bond market looks expensive. In 1958, U.S. treasuries traded on a real yield of more than 2.1 percent compared to the negative 0.8 percent now," Buckland says. "The current combination of investor risk aversion and QE-influenced financial repression leaves bonds looking pricey. As bond investors increasingly realize what a bad deal they are getting, especially if we add in sovereign credit fears, so it would seem logical that capital will head back towards equities."
But he warns that return to the heady days of equity markets -- even with expensive bonds -- is not likely to happen overnight.
"The scars left by two 50 percent-plus bear markets and the ongoing anaemic state of the developed world economy means that we remain wary of jumping on any rally to say 'this is it, the cult is coming back.'"