If a long period of growth underpins equities, does it automatically follow that bonds will be undermined?

Economic View: Governments need a long period of very low rates to correct the still-overstretched balance sheets

So what else do you do with your savings? It is the tough question facing every fund manager whenever a long bull market in equities seems to be maturing, but it is one that is given particular legs by the unattractiveness of other asset classes, particularly bonds. Right now it is the question that anyone talking with money managers will hear again and again. The strength of developed market shares has surprised even the natural enthusiasts for equities, but the recent slight shading back (and the recovery in distressed European sovereign debt) has spurred some managers to ponder whether this is the time to hedge their bets.

Against this background it is intriguing that Goldman Sachs, at least, is reasserting its overweight equities position. It is a line that has proved very right over the past year, but the air is rarer now as prices have climbed. Its global asset allocation update makes the following calls for 12 months out: global equities will return 9.4 per cent; cash 0.5 per cent; five-year corporate bonds minus 1.7 per cent; commodities minus 5.5 per cent; and 10-year government bonds minus 7.6 per cent.

That is a pretty strong call, as strong on the negatives as on the positives, so what is the argument behind it? In a nutshell, it is that US and European growth will gradually strengthen through the year and that will drive higher corporate earnings, which will in turn underpin the higher share prices. You can see the growth projections in the two graphs, with much higher growth in the US as you would expect, but Europe escaping the renewed stagnation that some currently fear. The graph also shows Goldman's calculation of a current activity indicator, which gives a smoother and, in my view, more credible path for economic activity than the official GDP statistics. However, despite the higher expectations for US growth, Goldman is less positive about US equities than about European, largely because US valuations are already more demanding.

The negative view on bonds suggests that the US yields on 10-year Treasuries will rise from their present 2.6 per cent to 3.5 per cent, while in the UK gilts will go from 2.7 per cent to 3.4 per cent, and German Bunds from a bit above 1.3 per cent to 2.6 per cent.

Energy and commodities? Here the view is that a year from now Brent oil will come back to $100 a barrel, while West Texas Intermediate will be $90 a barrel. Most commodities will be off around 10 per cent, with a couple of notable exceptions: soya beans will be down particularly sharply and gold will be down to $1,050 an ounce – at the moment it is above $1,300.

Lastly, a word on currencies: here the view is that the euro will strengthen against the dollar, and the pound to stay roughly steady with the euro, maybe rise a bit – but no real fireworks on the exchanges.

Well, that is the view. What should the rest of us think about this? For a start, we should take the big economic call, that the developed world's recovery will broaden and strengthen for some time yet. Standing back from our own worries about an unbalanced recovery and all that, I think the general view stands. Common sense says that if you have a particularly deep downswing in the economic cycle and then a particularly weak recovery, you jolly well ought to get a long period of expansion. We have had six years of expansion already but it would be reasonable to expect, say, 10? There are quite understandable concerns about some asset prices, particularly property, but it is hard to see any real evidence of a lack of general capacity in labour markets or anywhere else. So the circumstances that bring an expansion to an end are not really evident yet.

If the idea that the long growth period will continue underpins equities, will that same idea undermine bonds, or at least undermine them to the extent that Goldman expects?

Here the question is really: what is normal? For US and UK government yields to be 3.5 per cent would, in any other period, seem pretty normal, arguably quite low. This only seems high when set against the backdrop of the past six years. The argument against this is that governments need a long period of very low rates to correct the still-overstretched balance sheets of individuals, and indeed themselves. But the argument that rates have to stay low because neither voters nor governments can afford to pay a reasonable return for the money they have borrowed is a dodgy one. Besides, the policy hasn't worked very well in Japan, has it?

Actually the argument is how quickly the world gets back to normal long-term interest rates: is it over the next year or will it be over the next several years? What is not really in dispute is that rates will eventually rise.

Against all this, how does the "buy equities, sell bonds" message stack up?

Well, it certainly fires a shot across the bows of British pension fund practice. Most occupational pension funds have followed the "safe" path of switching from equities to fixed interest, thereby missing out on one of the best equity rallies of all time. If the total return on gilts in the year ahead is anything like the minus 7.6 per cent expected for bonds as a whole, putting pensioners' money into this asset class, far from being safe, is profoundly dangerous. Yet the cover-your-tail incentives for pension fund trustees pushes them in this direction. Such is the way of the world, any rebalancing back to equities will come too late.

My own view, for what it is worth, is to be more confident of the negative story about bonds than the positive one about equities. We can be pretty sure bonds will be a bad buy; we can be only mildly confident equities will be a good one. But asset allocators have to allocate and the very long view, of course, favours equities.

Start your day with The Independent, sign up for daily news emails
News
people
News
John Rees-Evans is standing for Ukip in Cardiff South and Penarth
news
Arts and Entertainment
Bianca Miller and Katie Bulmer-Cooke are scrutinised by Lord Sugar's aide Nick Hewer on The Apprentice final
tvBut Bianca Miller has taken on board his comments over pricing
Life and Style
Approaching sale shopping in a smart way means that you’ll get the most out of your money
life + styleSales shopping tips and tricks from the experts
PROMOTED VIDEO
News
Elton John and David Furnish exchange marriage vows
peopleSinger posts pictures of nuptials throughout the day
News
in picturesWounded and mangy husky puppy rescued from dump
Sport
David Silva, Andy Carroll, Arsene Wenger and Radamel Falcao
football
ebooks
ebooksA year of political gossip, levity and intrigue from the sharpest pen in Westminster
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

SThree: Trainee Recruitment Consultant - LONDON

£20000 - £25000 per annum + OTE £40,000 + Car + Pension: SThree: SThree are a ...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE £35K: SThree: We consistently strive to be the...

SThree: Graduate Recruitment Consultant

£20000 - £25000 per annum + OTE £35000: SThree: SThree are a global FTSE 250 b...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE £35K - £45K: SThree: SThree Group have been we...

Day In a Page

Surrounded by high-rise flats is a little house filled with Lebanon’s history - clocks, rifles, frogmen’s uniforms and colonial helmets

Clocks, rifles, swords, frogmen’s uniforms

Surrounded by high-rise flats is a little house filled with Lebanon’s history
Return to Gaza: Four months on, the wounds left by Israel's bombardment have not yet healed

Four months after the bombardment, Gaza’s wounds are yet to heal

Kim Sengupta is reunited with a man whose plight mirrors the suffering of the Palestinian people
Gastric surgery: Is it really the answer to the UK's obesity epidemic?

Is gastric surgery really the answer to the UK's obesity epidemic?

Critics argue that it’s crazy to operate on healthy people just to stop them eating
Homeless Veterans appeal: Christmas charity auction Part 2 - now LIVE

Homeless Veterans appeal: Christmas charity auction

Bid on original art, or trips of a lifetime to Africa or the 'Corrie' set, and help Homeless Veterans
Pantomime rings the changes to welcome autistic theatre-goers

Autism-friendly theatre

Pantomime leads the pack in quest to welcome all
The week Hollywood got scared and had to grow up a bit

The week Hollywood got scared and had to grow up a bit

Sony suffered a chorus of disapproval after it withdrew 'The Interview', but it's not too late for it to take a stand, says Joan Smith
From Widow Twankey to Mother Goose, how do the men who play panto dames get themselves ready for the performance of a lifetime?

Panto dames: before and after

From Widow Twankey to Mother Goose, how do the men who play panto dames get themselves ready for the performance of a lifetime?
Thirties murder mystery novel is surprise runaway Christmas hit

Thirties murder mystery novel is surprise runaway Christmas hit

Booksellers say readers are turning away from dark modern thrillers and back to the golden age of crime writing
Anne-Marie Huby: 'Charities deserve the best,' says founder of JustGiving

Anne-Marie Huby: 'Charities deserve the best'

Ten million of us have used the JustGiving website to donate to good causes. Its co-founder says that being dynamic is as important as being kind
The botanist who hunts for giant trees at Kew Gardens

The man who hunts giants

A Kew Gardens botanist has found 25 new large tree species - and he's sure there are more out there
The 12 ways of Christmas: Spare a thought for those who will be working to keep others safe during the festive season

The 12 ways of Christmas

We speak to a dozen people who will be working to keep others safe, happy and healthy over the holidays
Birdwatching men have a lot in common with their feathered friends, new study shows

The male exhibits strange behaviour

A new study shows that birdwatching men have a lot in common with their feathered friends...
Diaries of Evelyn Waugh, Virginia Woolf and Noël Coward reveal how they coped with the December blues

Famous diaries: Christmas week in history

Noël Coward parties into the night, Alan Clark bemoans the cost of servants, Evelyn Waugh ponders his drinking…
From noble to narky, the fall of the open letter

From noble to narky, the fall of the open letter

The great tradition of St Paul and Zola reached its nadir with a hungry worker's rant to Russell Brand, says DJ Taylor
A Christmas ghost story by Alison Moore: A prodigal daughter has a breakthrough

A Christmas ghost story by Alison Moore

The story was published earlier this month in 'Poor Souls' Light: Seven Curious Tales'