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Schroders Thought Leadership Live underpins the Small Rotation theory

At Schroders first Thought Leadership Live interactive debate hosted in London, a panel of senior investors and experts explored the much-vaunted theory of the ‘Great Rotation’.

Panellists Peter Harrison, Schroders Global Head of Equities, Philippe Lespinard, Schroders Co-Head of Fixed Income, Alan Brown, Senior Adviser and former CIO of Schroders, and our guest panellist and funds industry expert Diana Mackay debated the Great Rotation theme and looked at some of the key current market themes.

The overwhelming view from the panel was that there is no single Great Rotation happening but that several smaller, more subtle, rotations are underway.

Fixed Income:

Philippe Lespinard, Co-Head of Fixed Income, commented:

“We are not currently seeing assets leave fixed income for equities, rather that the rotation is taking the form of investors moving out of cash and government bonds into corporate bonds and emerging market debt. With a narrowing of the choices in the bond world for finding income, investors are having to take on greater risk in order to get the equivalent income of the past.”

Global Equities:

Peter Harrison, Global Head of Equities, commented:

“We are experiencing a somewhat schizophrenic situation whereby equity markets are rising despite there being a strong bias towards defensiveness. The valuations of many defensive, high-dividend stocks such as US utilities are becoming extremely stretched. I believe this could be changing, most notably we have seen this in the US where it has been possible in recent weeks to discern a rotation from defensives into more cyclical areas as the rally starts to broaden.

“However, investors need to see greater confidence in the economic story before a more decisive rotation within equities occurs.”

Guest speaker Diana Mackay, CEO of MackayWilliams and publisher of fund flow tracker FundRadar, echoed the view of the other panellists that a Great Rotation has not materialised yet.

Diana Mackay, CEO of MackayWilliams, commented:

“Certainly at the beginning of the year we would have been tempted to think the Great Rotation was about to happen. We saw huge flows into equities, but interestingly enough it was not coming from bonds. The flows were, most certainly, from new money. The flows into bond funds are still significantly more than the flows into equity funds.”

Shift to emerging markets

All the panellists agreed that emerging markets have continued to strengthen their position and importance as flows to the asset class show no signs of easing.

Alan Brown, Senior Adviser, commented:

“The lure of emerging markets reflects the topsy turvy nature of this new world we are investing in, as investors start to play by a new set of rules.”

Philippe Lespinard, Co-Head of Fixed Income, commented:

“The traditional notions of what constitutes a safe haven have been turned on their head. Emerging markets are now being seen as a safer place to invest than some European markets. If you look at the deterioration of sovereign credit quality in the core Western markets – never mind the peripherals – and compare them with the deficit and debts of most emerging markets, the metrics are much better in emerging markets.”

Alpha environment

The panel took the view that this is an environment for alpha managers to thrive.

Peter Harrison, Global Head of Equities, commented:

“In the current market situation correlations between stocks are starting to come down and that gives you more opportunity to behave as a stock picker rather than as a market direction trader. Clients are focusing more on total return and absolute return mandates, moving away from an obsession with indices in both equities and bonds.”

To conclude the live debate the panellist discussed ‘When will QE end or interest rates rise?’.

With the unconventional measures taken by central banks distorting the market by driving an increase in liquidity, the panel concurred that whilst it was difficult to predict a date, as so many countries and factors are involved, extreme care will have to be taken when exiting quantitative easing (QE).

On the topic of when interest rates will rise, this question was put to the audience*. 54% thought interest rate increases were likely to come in the next two years.

*the audience was made up of over 150 clients and consultants internationally.

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Beth Saint, International PR

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Kathryn Sutton, International PR

+44 (0)20 7658 5765/

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Schroders plc

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