Relative asset performance: still a chance for equities

In Short

The environment in which investors operate is changing: the business cycle is peaking, and yields are expected to rise both in real and nominal terms, albeit moderately.

Highlights:

  • According to historical analysis, levels at which yields hurt the relative performance of equities versus bonds are distant from current ones. Mind the 2% threshold for the US 10-year T-bond yield.
  • This cycle may be different. The long downward trend of real rates has made equities more dependent on low rates. Even a small increase in yields could hurt valuations, e.g. PEs. But strong earnings growth is offering some cushion.
  • The 12m yield/equity correlation turned negative (till -0.6), i.e. equities are more exposed to a yield increase. Even if it has moved to zero lately, it could remain in negative territory for longer.
  • We also looked at the effects of higher bond volatility and sharp yield changes. Historically, they have not been a cause per se of a negative performance of equities versus bonds.
  • Lessons from the past in the relative play equity versus credit have to be taken carefully, as the public focus on economic preservation has made the tail risk on credit much thinner than before Covid.

Download the full publication below

Core Matters ǀ Relative asset performance: still a chance for equities
PDF
Picture

© Generali Investments, all rights reserved. This website is provided by Generali Investments Holding S.p.A. as the holding company of the main asset management companies of the Generali Group having, directly or indirectly, the majority shareholding in the companies listed below (hereinafter jointly, “Generali Investments”). This website may contain information related to the activity of the following companies: Generali Asset Management S.p.A. Società di gestione del risparmio, Infranity, Sycomore Asset Management, Aperture Investors LLC (including Aperture Investors UK Ltd), Plenisfer Investments S.p.A. Società di gestione del risparmio, Lumyna Investments Limited, Sosteneo S.p.A. Società di gestione del risparmio, Generali Real Estate S.p.A. Società di gestione del risparmio, Conning* and among its subsidiaries Global Evolution Asset Management A/S - including Global Evolution USA, LLC and Global Evolution Fund Management Singapore Pte. Ltd - Octagon Credit Investors, LLC, Pearlmark Real Estate, LLC as well as Generali Investments CEE. *Includes Conning, Inc., Conning Asset Management Limited, Conning Asia Pacific Limited, Conning Investment Products, Inc., Goodwin Capital Advisers, Inc. (collectively, “Conning”).