In its May client publication, Citibank argues that world’s markets have been dragged down by one crisis after another, but now that the Iraq war is over, and the SARS outbreak appears contained, the latest research from its brokerage research house Smith Barney Citigroup advises investors continue to ignore equities at their own risk.
Lim Ai Meun, Citibank’s head of research communications for the Global Consumer Group, Asia Pacific, said it comes as no surprise that investors are shy of equities, but the markets do deserve a closer look:
"Although equity markets have shown a tentative move upwards, the dramatic post-war rally seen in the wake of the 1990 Gulf War has not yet materialized. However, it is not just economic worries that are holding investors back. The losses of the last three years have put the spotlight on equity risk and created much skepticism about equity potential," she said.
Equities therefore continue to be spurned, not just by retail investors, but also by pension fund managers.
In fact, equity allocations now constitute just 40 percent of the mutual fund distribution in the US well below the Smith Barney Citigroup neutral benchmark allocation of 55 percent.
Lim said that any shift into equities will be hesitant and erratic, and bonds should continue to have a place in an investors’ portfolio.
"It is becoming clear, however, that a bond-only portfolio and an irrational despondency towards equities may expose portfolios to additional risk without the potential for additional growth," she said.
"A balanced portfolio is likely to offer investors the ability to capture modest upside whilst maintaining some insulation from unforeseen bad news. As we strive to balance our lifestyle needs with out needs for care and precaution, so too should we approach our investment and finances," Lim concluded.
It is interesting to note, however, that investors’ allocation to bonds has not returned to levels seen in the early 90s. Instead, over a third of US assets is still held in cash (money market funds), ready to move into investment products at the appropriate time.
There is reason to believe that at least a portion of this money will gradually find its way back into equity markets, despite current investors caution. It is clear that extreme risk aversion is waning, and investors are now in a desperate search for yield. As a result, US high-grade corporate, high yield and emerging market bond spreads have narrowed substantially over the past six months.