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Reporting season intensifies asset reallocation
The current shift in investor asset allocation from bonds to equities will be intensified by the strong reporting season just passed, according to Dalton Nicol Reid chief investment officer Jamie Nicol.
But Nicol warned investors to focus on quality to distinguish between equities that have genuine operating upside as the cycle turns as opposed to a simple short covering rally.
"Given risks now seem to be easing and interest rates are low, we expect flows to be supportive of equities," Nicol said.
"Additionally, any pullback in the market is likely to be well supported by the amount of money sitting on the sidelines."
Growth companies which had enjoyed a strong run were being sold off where results did not meet expectations, Nicol said.
"The last few days we have seen a selloff in growth companies that missed their results expectations, and I think this signals we will see a little more dispersion in performance rather than the rising tide lifting all boats that we have enjoyed of late," he said, adding it would increase opportunities.
Equities look more attractive than bonds when compared with the price-to-earnings ratio (PE) of the market or dividend yields, according to Nicol.
He said the market was trading at 13.8 times PE, which looked average and not particularly cheap on an absolute basis; however it was not expensive either.
"However once we compare the market to low interest rates, which look like they are here to stay, the story is very different.
"In particular, we note that the dividend yields available from companies are in many cases already twice the yield available from bonds, and the dividend yield should be growing," he said.
Nicol said investors had valued the security of bonds regardless of price, but needed to weigh up the returns as well as the potential of another bond crisis if inflation spiked in the US.
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