This story was first published on June 5 for subscribers only but has now been opened for general readership.


- Global markets shifting to "risk on"
- Low inflation underpins monetary easing
- Global credit trade crowded
- Corporate earnings growth is key


By Greg Peel

Global investment manager Standard Life Investments believes that a stronger corporate sector and improving market confidence will slowly lead investors globally back into equities and property and out of fixed income assets. Standard Life's head of global strategy, Andrew Milligan, expects to see corporate earnings pick up as policy makers take more action to sustain global activity. Positive free cash flow, high dividend yields and solid company balance sheets will support equities through the remainder of 2013, Milligan suggests.

The global equity market has already staged a significant rally from mid last year as investors have shifted away from a post-GFC defensive stance still evident in 2012, and towards the addition of more risk. Europe appears to have settled down, the US recovery has become more recognisable, rhetoric from the new regime in China has been comforting and Japan has taken off. Underlying the "risk on" shift has nevertheless been the prevalence of global monetary stimulus, whether by direct quantitative easing (QE) or through interest rate cuts. In recent months, no less than fifteen central banks across the globe have cut their cash rates.

Yet the sharp rally to date, which has already seem some correction (Japan, Australia), has not drawn mainstream retail investor support. Rather, the search for yield in a low interest rate environment has inflated stock prices, with a significant shift out of fixed income yet to materialise. As the following graph illustrates, global investors switched quickly into cash in 2008 and began to reduce cash positions once the US Federal Reserve's initial QE program began in 2009, but shifted money into bonds more so than in equities. The question now is as to whether a more traditional "risk" rotation out of bonds and into equities and other risk assets will transpire.