Why Investment Quorum favours equities over bonds

Lee Robertson, CEO of wealth management firm Investment Quorum, explains why he is still positive on equity markets despite negative sentiment.

We build our client portfolios through a multi-asset, multi-region approach to investment, combining managers by blending their individual styles and outlooks toward different asset classes, investment strategies and 
fund compositions.

However, given the recent strong falls in equity markets, this is a problematic time to be blending funds and particular attention has to be paid to the underlying assets within the fund and our overall client exposure to the various asset classes.

Value in equities

Commenting on asset classes comes with the usual caveats of predictions of often being disproved by changing events but in terms of our current standpoint we believe that both strategically and tactically, there is still value in equities versus the core government bond markets of the UK, US and Germany.

Valuations continue to look fairly reasonable and corporate profits have been pretty good considering all of the events of the past couple of years. However, it is fair to say that earnings numbers and guidance for 2012 is downbeat as most commentators continue to expect a fall in global GDP.

Given where we are in terms of macro events, the eurozone particularly, the markets look set to continue to demonstrate real volatility by lurching down on bad news but reversing out on good news.

Obviously, the US and Chinese economies are of paramount importance going forward and outside of the eurozone crisis market watchers will be looking for any better than expected news which would act as a positive for the equity markets. Unemployment is another problem area both in the US and Europe, including the UK, and has remained stubbornly high for much longer than was either predicted or expected.

We are in the midst of a particularly difficult period, regardless of the eurozone crisis, global growth is stubbornly anaemic in the developed world and, while numbers are much better in the developing world, the drag from the events in Europe will undoubtedly take its toll over time if a resolution is not found over the coming weeks and months.

Upside risk

Given that sentiment is so poor any unexpected good news will be a boost for the equity markets and the risk is most likely on the upside hence our favour for equities over bonds.

Fixed interest remains a really thorny issue but we continue to favour investment grade and high yield over sovereigns, particularly those of the western economies.

We only see core sovereign bonds being attractive in the UK, US and Germany if we were believe in a forthcoming deflationary period. We do not believe that we will experience deflation however a second recession in Europe cannot be ruled out.