Policies slow shift to equities

Regulators of pension funds and super schemes are slowing down the movement of capital from fixed income to equities, according to Andrew Milligan from Standard Life Investments.

He said investors were moving capital from fixed income to equities but it would occur at a "glacial pace".

Milligan said 15 per cent of central banks had cut interest rates, which was having a positive effect on corporate earnings. A stronger corporate sector and improving global confidence would slowly see investors return to equities and move out of fixed income assets, he said.

"There are some interesting drivers supporting the equity market, of which the desire for yield is the most obvious, but I do think the rotation that we see will be glacial, gingerly, gradual rather than anything very pronounced," he said.

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Equities would benefit from positive free cash flow, high dividend yields and solid company balance sheets over the course of 2013, he said.

Additionally, pressure on bond and credit values could come from higher government bond yields off the back of data pointing to a sustained global recovery and quantitative easing, which would further encourage fixed income outflows.

However, Milligan said the actions of regulators around the world should not be under-estimated.

Globally, pension schemes and superannuation funds have been encouraged to hoard fixed income — although they were coming around to the need to implement policies which encouraged investment in economic growth, Milligan said.

"For a lot of structural reasons pensions funds and insurance companies around the world are very much being told by the regulator ‘you've got to keep lots of fixed income', so this sharp move out of income assets to equity assets doesn't make sense," he said.

He said the global business cycle had moved into a "soft patch" that would not abate quickly as governments needed to take action with regard to their national economies.