The Great Rotation, the idea that there will be a big shift from bonds into equities once central banks stop injecting cash into markets around the world, has been delayed by the Federal Reserve’s decision not to taper just yet, but there is reason to doubt that it will happen at all. While the end of QE will have a profound effect on markets, the notion that everyone will respond in the same way greatly oversimplifies the situation.
Global AUM’s great rotation
“Our bottom-up analysis of $89 trillion of global assets under management suggests there are major structural headwinds to the ‘great rotation’ story,” says a Morgan Stanley (NYSE:MS) report by lead author Bruce Hamilton. “Re-allocations by Institutional investors (~60% of global AUM) will be neutral for equities, at best. Defined Benefit Pension schemes are likely to reduce equity allocations as they de-risk to better match assets and liabilities, and Solvency ll regulations for Insurers will confine re-risking to non-equity assets.”
Institutional investors are involved in long-term de-risking, a process that was accelerated by market conditions during the recession, but had already begun when it hit and are unlikely to reverse themselves as economies recover. UK pensions and insurance companies, shown in the graphs below, are two clear examples of these trends. Sovereign wealth funds are expected to put more emphasis on real assets and alternatives than equities in the coming years, and insurance firms can’t fully re-risk with stocks even if they want to.
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Investor demand on regular income
“We think aging demographics and lower risk appetite will focus investor demand on regular income, capital preservation and lower volatility of returns, limiting the strength of any rotation into core equities,” the report says, pointing out that retail and high net worth investors (about 40 percent of global AUM) as a group are getting older, and their investment horizon is naturally shortening.
Just these two trends together complicate the picture for the vast majority of global assets under management, and throw the great rotation story into doubt. No one’s arguing that there won’t be a shift towards equities over the next year or so, but it might not be the era-defining event that some analysts seem to expect.