Lombard Odier: Get Ready for Reverse ‘Great Rotation’

Wednesday, 13 Mar 2013 11:09 AM

By Dan Weil

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Since late last year, financial markets have been abuzz with talk that 2013 will witness a ‘great rotation’ out of bonds and into equities.

But Swiss private bank Lombard Odier sees it the other way around.

The Dow Jones Industrial Average has jumped 10.3 percent so far this year, hitting record highs six days in a row through Tuesday.

Editor's Note:
Billionaires Dump Stocks. Prepare for the Unthinkable.

Sounds like a great rotation right? Not so fast, says Lombard Odier in its latest Investment Strategy Bulletin.

It is “misleading to talk of a great rotation. Rather, at any point in time, the marketplace consists of a certain stock of cash, bonds and equities, whose relative returns adjust depending on the relative supply/demand forces,” according to Lombard Odier.

“An individual can rotate, but the market in aggregate cannot, as the outstanding stock of assets must be held by someone.”

"A theme for 2013 might well actually be the rotation out of equities and back into bonds," the report states.

“Far from envisaging a sustained and large equity rally on the back of a ‘great rotation’ our best-case scenario would be for the equity rally to lose some steam, and the worst-case scenario for it to experience a significant sell-off.”

Stocks are rising because companies are buying back their shares with cash they are accruing from debt issuance, the firm says. Eventually this trend will push stocks into overbought territory.

"This adds to other red signs, such as investor complacency, rich valuations and diminishing QE [quantitative easing] marginal effectiveness (or worse: talks of a QE exit strategy by some Fed members),” the report states.

Pimco CEO Mohamed El-Erian says that while stocks are rising now, it’s not at the expense of bonds. Rather, investors are switching money from cash to stocks, he tells CNBC.

“We have seen no sign as of yet of the ‘great rotation’ that people are talking about,” he says.

“In the short term, we think that we are range-bound on Treasurys. And the range is 1.85 to 2.25 percent on the 10-year yield.”

Editor's Note: Billionaires Dump Stocks. Prepare for the Unthinkable.

© 2014 Moneynews. All rights reserved.

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