Citi sees a rally in equities precipitating a global economic recovery in 2014, as a result of rising, rather than a falling, demand for bonds.
"Policy makers are working to reduce macro risks. 2014 is looking like a recovery year and we expect the market to discount that over the coming 6-9 months. This could precipitate flows back to equities," the note says.
"But before that, with rates held low, corporates have a compelling arbitrage: use cheap debt to buy equity. Companies have started, but as confidence in the recovery increases, buying should follow."
Citi does not see a rally in equities as being the likely result of an asset allocation away from bonds, despite their more attractive valuation.
"The volatility and relative lack of returns from equities make the classic asset allocation decision back to equities likely to be one that takes time... In a world of low growth, very low policy rates and reduced macro risks, it is difficult to see a sharp sell-off in bonds."
Instead, the Citi analysts expect that cheap debt, the result of a high demand for bonds, will allow companies to fuel an equity recovery themselves.
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Keywords: MARKETS EUROPE STOCKSNEWS