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Risk On Is Back—But Is It Time to Quit Bonds for Stocks?

Monday, 3 Dec 2012 | 12:00 AM ET


Christine Balderas | Photodisc | Getty Images

As the mood turns optimistic towards the global economy, is it time to quit safe-haven bonds and pile up on some risk assets instead? It may be a tad too early, analysts tell CNBC.

Despite bullish signs like the upward revision of U.S.third-quarter growth figures and quickening of manufacturing activity in China, some experts are still not convinced that the global economy will do any better next year and hence don't recommend picking up stocks and abandoning bonds.

No doubt, stocks have done well over the past couple of weeks, with the S&P 500 gaining almost 5 percent and the MSCI Asia Pacific Index adding 4.4 percent since November 15.

"Last month, we saw a much larger move of money into equity funds against bond funds in the U.S. — $15 billion in equity and $5 billion into bond funds, so that gives you an idea of where the money is rotating to," said Martin Lakos, division director of Macquarie Private Wealth in Sydney."It's part of the growing confidence."

"There's no doubt we are starting to see inflows back to riskier assets particularly the equity markets," he added.

Meantime, yields have also risen as investors start selling bonds. The yield on the U.S. 10-Year Treasurys, for example, has risen to 1.627 percent, up from 1.58 percent on Nov. 15.

But it may not be time yet to declare the end of a bull run in bonds, despite a slowdown in flows to the asset class and investors should approach the stock markets with "caution," said analysts.

According to Stephen Nash, director of strategy and market development with bond broker FIIG Securities in Sydney, some estimates for global growth may be too optimistic and a case can still be made for sovereign and corporate bonds in 2013.

(Read More: Morgan's Stanley Doom Scenario: Major Recession in 2013)

"I think going forward, with one official institution after another downgrading the outlook for growth, I think there seems to be quite a stark difference between official forecasts and private sector forecasts, with official forecasts being quite conservative on growth," Nash told CNBC Asia's "Squawk Box" on Monday.

He added that, "We are going to have a fairly tricky year for equities. Broadly with that low-growth scenario, equities would find it difficult to continue to rally strongly. We would go more with lower growth and possibly new lows in bond (prices) in 2013."

The Organization for Economic Cooperation and Development (OECD) last week slashed its estimates for 2013 global growth to 3.4 percent from its May forecast of 4.2 percent, and cited the debt crisis in the euro zone as the biggest threat to the world economy.

Bonds, as a result, will still continue to draw inflows next year, added Andre de Silva, head of Asia-Pacific rates with HSBC.

"We're still at the back of very weak growth in the major markets," de Silva said on Monday. "You can argue that there's been a bond rush and there's a bond bubble but I think it's too early. If you look at the central banks, the Fed, I think, is close to adding further QE (quantitative easing) and the ECB (European Central Bank) in some shape or form, and let's not forget the Bank of Japan as well."

"As long as that flush of liquidity is still very dominant, I still think the major safe havens and major bond markets will benefit," he added.

Bonds, especially U.S. Treasurys, have been the biggest beneficiaries of the wave of liquidity unleashed by central banks' quantitative easing since the financial crisis in 2008, de Silva said in a recent report.

Investor inflows into bond funds have crossed the $400 billion mark in the first 10 months of the year, a record for bonds, according to data provider EPFR Global.

The second and third rounds of QE by the Fed were announced in November 2010 and September 2012.

By CNBC's Jean Chua

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