Expert views: Bonds vs Equities

This article is part of
Bonds vs Equities - May 2014

In such an interesting economic environment Investment Adviser asked the experts to provide their outlook for the two main asset classes.

Simon Brett, chief investment officer, Parmenion Investment Management


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For the US and UK, the recovery is proceeding and we are near recouping all the growth that had been destroyed since the financial crisis of 2008. Unemployment has steadily come down in both countries and there is much talk of the first rise in interest rates. Stockmarkets may see this as positive, as both central banks want the recovery to be fully established before they make any moves. Across the Channel, we remain positive on European markets. Divorce the problems of the eurozone from the stockmarkets and there are some first rate European companies in which to invest. European valuations are lower than in the US and UK, which also adds to their attraction. Japan continues to be a bit of a wild card, but we remain on the optimistic side that Abenomics will work to reignite their stock market. More caution is required for emerging markets. The past year has demonstrated how fickle cash can be, with many investors moving monies to more developed markets.

Fixed income

Is the 30-year bull market in bonds over? At some stage quantitative easing (QE) will end and interest rates will ‘normalise’. The intriguing question is what will this normal level be? To mitigate some of the effects of rising interest rates we prefer short-dated gilts and bonds, where the prices will be less affected by rate rises. And what of index-linked? Expectations of rising inflation as a result of QE has not occurred, indeed inflation is now below the 2 per cent level in the UK. However, inflation will help governments inflate away their debt and therefore we remain positive on index-linked for the longer term.

Richard Philbin, chief investment officer, Harwood Multi Manager:


Returns from any asset always depend on two things. An entry price and an exit price. As time progresses, the difference between the two should expand to take into consideration variables such as economic growth, dividends, inflation and so on. Taking the price/earnings ratio as a guide, the FTSE 100 presently is on 13.5x and the FTSE 250 registers 19.1x. Is there a better argument for UK large-cap stocks? Especially considering a dividend yield of 3.54 per cent versus 2.53 per cent as well. On a 13.5x p/e, large-cap equities do not look stretched.

Fixed income:

When considering fixed income investing, the enemy is inflation and interest rates. Interest rates, globally, are not going up anytime soon. The US is likely to be the first mover, but will not rise until a good while after QE ends, which is not likely this year. Gilts do not appeal – yields on the 10-year market stand at an unattractive 2.93 per cent. If held to maturity you would suffer capital loss – taking inflation into account over the next decade.