Dave Fishwick, head of macro and equities at M&G Investments, believes one of the most interesting developments in the first quarter of 2014 has been the behaviour of developed market government bonds.

“If you believed many people’s year-ahead predictions at the start of 2014, it would have seemed that most bonds were unloved, especially at longer maturities,” he says. “However, it did not take long for the valuable role these bonds can play in a multi-asset portfolio, if bought at the right price, to manifest itself.

“Worries about the pace of growth in China, and then the rise of tensions in Ukraine, caused volatility in most equity markets, but long-dated US Treasuries, gilts and German bunds rallied.”

But Mr Fishwick observes that the performance of global equity markets has been “encouraging”.

He adds: “Most mainstream developed equity markets have performed relatively well in the first quarter, with the US S&P 500 index reaching all-time highs. Much of this has come from improved sentiment among investors rather than growth in corporate profits.”

For David Vickers, senior portfolio manager on Russell Investments’ multi-asset growth strategy, all asset classes currently look overvalued.

“Usually when you’re in that situation you look across to government bond markets and you see some value. We don’t see that either, I think the problem being that we’re much further through the market cycle than we are the economic cycle and interest rate cycle.”

He argues that with government bonds looking expensive and with “no real earnings growth” over the past couple of years, investors will be left in a world where returns are going to be much lower than they have been for some time.

“We think equities will outperform bonds, but our biggest conviction is we’re not heading into recession any time soon. You’ve got the G3 economies, the US, Japan and now the UK all moving ahead quite positively in economic terms, and even in Europe things are less bad,” he adds.

Mr Fishwick warns that investors may have to be less reliant on the big beta returns that have been seen in equity markets and expect more of their returns to come from stock selection and alpha.

He says: “We don’t think we’ll have a difficult time this year but I think things are moving in that direction if equity markets and other assets continue to rally without other earnings coming through.”

It might not be what investors want to hear but perhaps they can find some consolation in the prospect that as the market throws up risks and uncertainties, it will also create opportunities for investors. The question remains whether those will be in equities or fixed income.

Ellie Duncan is deputy features editor at Investment Adviser