Mellon Capital: Even European equities are more attractive than bonds
The group says inflation will continue to rise faster than most fixed interest yields.
Equities, even those in the eurozone core, are currently more attractive than fixed-income investments, according to Vassilis Dagioglu, managing director and head of asset allocation at Mellon Capital.
Dagioglu says that despite the sluggish economic environment, valuations in developed markets are attractive and forecasts of significant earnings growth are supportive of investment there.
"In contrast, we find most fixed income securities provide relatively unattractive valuations and little compensation for even moderate inflation in the future," he said.
On the day that the Bank of England launched a third round of quantitative easing
, widely seen as a precursor to a period of inflation, Dagioglu’s words are a timely warning to those who have positioned themselves defensively in bonds.
Last month Artemis manager Simon Edelsten told FE Trustnet
that fixed income investors were storing up trouble for any period of inflation in the future.
Even though Dagioglu says that markets will remain sensitive to the ongoing eurozone crisis, he believes that equities in the core countries of Germany, France and Holland are more attractive than those in Asia. Mellon Capital is concerned about the earnings quality of some companies in the Far East and for that reason prefers western markets.
The team is aggressive when it comes to the sectors it favours, preferring cyclicals such as energy, industrials and information technology stocks over the more defensive consumer staples and utility companies.
This is despite its lukewarm forecast for the global economy as a whole.
"Our proprietary global measure of leading economic indicators has slipped, reflecting modestly weaker values in most developed countries," said Gabriela Parcella, chief executive officer.
"However, the global leading economic indicators are still showing some growth, although at a sluggish pace."
Mellon Capital has reduced its projection for US economic growth for 2012 to 2.4 per cent from its earlier figure of 2.9 per cent, and it now expects global growth to be a miserly 2 per cent.
It has, however, lowered its inflation forecast for the country, saying that it now expects 2.5 per cent rather than the 2.7 per cent it predicted in March.
Mellon Capital is buying commodities at the lower end of its model’s allowed range, claiming there is ample supply relative to demand.
The team says there are pockets of opportunity in fixed income assets, such as German and UK sovereign bonds and corporate and high yield instruments in the US.