, such as equities, and into higher yielding fixed income and cash. It was set in motion with the end of the cheap money era, when central banks realised monetary settings were left too easy for too long, and rushed into coordinated tightening as inflation raged.
The high yield on bonds relative to dividends is a contributing factor and the convergence of the bonds with dividends may accelerate the shift. Australia’s three-year bond rate has surged from 2.8 per cent in April to an 11-year high of 4.2 per cent as the Reserve Bank has lifted interest rates at the fastest pace in history.
Mr Tevfik said equities had proved to be a better inflation hedge than bonds in the past while there was little evidence that relative valuations were a reliable indicator of future returns. Perpetual’s head of investment strategy, Matthew Sherwood, said there were two conclusions to draw from the historic convergence.The first was that duration, or exposure to interest rate movements, was more attractive, as falling interest rates can result in capital gains. The second was that investors would have to be more considered as to the types of businesses they owned in their equity portfolios in a low growth, high inflation world.
“However, we suspect these forecasts will prove to be too low and are based on a too bearish outlook for commodity prices,” Mr Tevfik added.